Federal Judge Rules Against SEC in Blockchain ICO Case

Judge Gonzalo Curiel of the Southern District of California recently denied the Securities and Exchange Commission’s (“SEC”) motion for a preliminary injunction against Blockvest, a Blockchain company, when he found that the SEC had not shown that Blockvest had violated US Securities Laws.  The SEC’s complaint alleged that Blockvest had engaged in the unregistered sale of securities in violation of Sections 5(a) and 5(c) of the Securities Act when it conducted its preliminary Initial Coin Offering (“ICO”).  It also alleged fraud in the offer and sale of these securities.  Blockvest protested this characterization and argued that it had only offered its Coin to 32 “testers” who collectively had put less than $10,000 worth of Bitcoin and Ethereum into the Blockvest Exchange.  As such, the testers did not reasonably expect to profit from the platform.  Judge Curiel agreed with Blockvest.   

In making this decision, Judge Curiel ruled that the SEC had failed to show that the investors bought into the offering with the expectation of making a profit– as required by the three-part “Howey” test for the definition of a security under the landmark 1946 U.S. Supreme Court decision in SEC v. W.J. Howey Co.  In response to this decision, government regulators and similarly situated plaintiffs will need to consider how the ICO was conducted to determine if there are truly Securities Law violations.