Court holds SEC has not proven pre-ICO cryptocurrency is a “security”
On November 27, the U.S. District Court for the Southern District of California denied the SEC’s motion for a preliminary injunction against a cryptocurrency company, concluding the agency failed show the currency tokens were “securities” as defined under federal securities laws. According to the order, the SEC filed a complaint against the company in October alleging it falsely claimed its initial coin offering (ICO) was registered and approved by the SEC and other regulators, including using the agency’s seal in marketing materials. At the time of the filing, the SEC claimed the company had already raised more than $2.5 million in pre-ICO sales. The SEC moved for a preliminary injunction to freeze the company’s assets and prevent the company’s owner from buying or selling securities and other digital currency during the pendency of the case. Upon review, the court noted the SEC must establish the company previously violated federal securities laws and there is a reasonable likelihood that it will happen again. The SEC argued the allegedly fraudulent marketing materials used to raise money from 32 “test investors” violated federal securities laws, while the company argued the investors did not have an expectation to receive profits as they were working with the company on the exchange’s functionality and therefore, the currency tokens were not “securities.” The court denied the SEC’s motion, concluding that it could not determine whether the tokens were “securities” under federal law without full discovery as there were disputed issues of material facts, including what the test investors relied on in terms of marketing materials before they purchased the cryptocurrency tokens.