In SEC v. Blockvest, Judge Gonzalo Curiel of the U.S. District Court for the Southern District of California enjoined Blockvest, LLC (“Blockvest”) from proceeding with a planned initial coin offering (ICO) of its “BLV” token. The decision follows the court’s reconsideration of its previous denial of the Securities and Exchange Commission’s (SEC) request for an injunction. Judge Curiel’s most recent decision will likely dampen hopes in the cryptocurrency industry that the courts will limit federal regulators’ oversight of new coin or token offerings absent specific action by Congress.
The Court’s Initial Decision Denying the SEC’s Request to Enjoin ICO
As described in Dechert’s previous update, in November 2018, the Court in Blockvest held that the SEC failed to establish that Blockvest’s pre-ICO distributions of tokens for testing purposes constituted the “sale” of a security within the meaning of the federal Securities Act of 1933. Based on this holding, the court refused to issue the preliminary injunction requested by the SEC. The decision garnered significant attention because it was the first federal court decision suggesting that a digital asset distributed in connection through an ICO may not be a security.
The Court’s Decision on Reconsideration
Following the initial decision, the SEC moved for reconsideration. The SEC argued that the court’s ruling improperly considered the intent of particular investors to determine whether Blockvest’s sale of token was a “security,” rather than confining its analysis to the “objective nature of the investment being offered to the public.”
Upon reconsideration, the Court agreed with the SEC in part. The court upheld its prior finding that disputed issues of fact concerning whether the actual securities in connection with its pre-ICO test phase prevented a determination that it had actually sold securities to investors within the meaning of the Supreme Court’s seminal decision in SEC v. W.J. Howey Co. However, the court agreed that it had overlooked the SEC’s argument that Blockvest’s website, whitepaper, and social media posts constituted “offer[s]” of “unregistered securities” in violation of the Securities Act. Applying the Howey factors to the contemplated ICO described on the Blockvest website, whitepaper, and social media posts, the Court determined that Blockvest impermissibly offered to sell “securities” to the public and granted the SEC’s requested injunction.
Blockvest argued that its website, whitepaper, and social media posts could not have been offers to sell securities, regardless of the application of the Howey factors to the investments they described, because they did not make an offer for the sale of a security with the “manifestation of intent to be bound” to sell securities, as would be required to constitute an “offer” under California contract law. The Court rejected this argument, holding that the meaning of the term “offer” in the Securities Act has “a ‘different and far broader’ meaning than [the term has] in contract law.” Applying precedent from the U.S. Court of Appeals from the Ninth Circuit and the U.S. District Court for the Southern District of New York, Judge Curiel held that Blockvest’s website, white paper, and marketing materials contained “offers” to sell securities.
Impact of the Decision
Like the prior decision in this case, Judge Curiel’s decision on the SEC’s motion for reconsideration is not a final disposition on the merits. As a technical matter, Judge Curiel only held that the SEC “has presented a prima facie showing of previous violations” of the Securities Act. However, as a practical matter, the court’s decision left little room for Blockvest to offer evidence that could rebut the SEC’s prima facie showing. Moreover, the court suggested that its assessment of Blockvest’s credibility will be heavily influenced by the past misrepresentations on Blockvest’s website about its coins being registered with regulators, including the fictitious Blockchain Exchange Commission, Blockvest’s attempts to file documents without its counsel’s authorization that did not comply with Rule 11 of the Federal Rules of Civil Procedure, and the withdrawal of Blockvest’s counsel following its prior decision. Taken together, these factors will make it difficult for Blockvest to ultimately prevail on the merits.