Tell it to the judge

A federal judge has ruled the SEC hasn’t done enough to prove Blockvest sold unregistered securities in its ICO. Hold your applause.

In an apparent first, a cryptoland startup has gone toe-to-toe with the U.S. Securities and Exchange Commission in a court of law and won—well, the first round, anyway.

On Tuesday, U.S District Judge Gonzalo Curiel of the Southern District of California denied the SEC’s request for a preliminary injunction against Blockvest, a company the SEC alleges violated “the antifraud and securities registration provisions of the federal securities laws,” deciding—for now—that there’s insufficient evidence to designate Blockvest’s BLV token a security.

So is it time to bust out the bubbly at Blockvest HQ and let those good-time ICOs roll? Not so fast, says Stephen Palley, a partner at the law firm Anderson Kill and co-chair of the firm’s Blockchain and Virtual Currency practice. “I don’t think [this is a big deal],” he says. “This is just a judge applying the law.”

In his ruling, Judge Curiel said the SEC hasn’t done enough to show that investors bought into the Blockvest ICO with the expectation to earn a profit from the “efforts of others”—a key component of the “Howey Test” in determining whether a transaction qualifies as an “investment contract” (i.e. the purchase of a security) and therefore within the SEC’s domain of regulatory authority.

Based on Blockvest’s own marketing and social media posts, the SEC alleged that the company raised more than $2.5 million from investors through an ICO. But as the company’s CEO and founder, Reginald Buddy Ringgold III, told Decrypt last month, Blockvest maintains that no such ICO ever took place.

Ringgold explained to the court that the $2.5 million was to come from a single investor, but the deal never actually went through. He also told the court that Blockvest’s initial offering only involved 32 “testing participants” who put in less than $10,000 worth of Bitcoin and Ethereum in total and that “the testers would not and could not keep or remove BLV tokens from the Blockvest Exchange.” Even though the SEC was able to produce checks from investors with the words “Blockvest” or “coins” written in the notes, the court ruled this wasn’t enough to prove that investors read Blockvest’s promotional materials and expected to profit from the tokens.

“It is certainly fair to say that while it may be that the vast majority of token sales were unregistered securities offerings, it may also be the case that some were not,” says Palley. “And if you want to say that one is, you have to muster the evidence and get a judge to agree. There’s a process. It’s not always going to be a slam dunk.” But this case is far from over.

Palley cautions against drawing broad conclusions from the denial of a preliminary injunction, noting that he expects the SEC to move for a full trial and seek a permanent injunction. (The SEC declined to comment on the future of its case against the company.) Indeed, Blockvest’s defense appears to rest on the fact that their ICO was only a drill and no real sale ever happened, which may be hardly comforting to the hundreds of other companies that genuinely generated millions from investors in token purchases and are now firmly in the SEC’s crosshairs.

Palley, however, offers some consolation: “What it kind of tells you—and I think there may be some comfort here—is that we operate in a country where there are courts, and we have a rule of law,” he says. “The SEC doesn’t always win. [It] has to satisfy evidentiary obligations as well.”

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