16 BLOCKCHAIN, TOKEN SALES, AND SEC GUIDANCE GOODWIN 2018. A decision on the motions to dismiss is expected in early 2019. Other defendants, including Centra Tech, did not respond to the complaint, and default judg- ments were entered as to those defendants in January 2019. United States v. Zaslavskiy, Case No. 17-cr-647- RJD, 2018 WL 4346339 (E.D.N.Y. Sept. 11, 2018) Maksim Zaslavskiy was indicted for securities fraud and conspiracy to commit securities fraud connection with two token sales: one conducted by REcoin Group Foundation, LLC (“REcoin”), which Zaslavskiy founded; and one conducted by Diamond Reserve Club (“Di- amond”). REcoin purportedly engaged in real estate investment and the development of real estate-related smart contracts. Diamond purportedly invested in dia- monds and obtained discounts from diamond retailers for Diamond members. The U.S. Department of Justice alleges that between January to October 2017, Zaslavs- kiy fraudulently induced investors to purchase tokens in connection with the REcoin and Diamond token sales by offering “investment opportunities” based on materially false statements. REcoin never purchased any real estate, no REcoin token ever was developed, and REcoin investors received no tokens. Likewise, Diamond never purchased any diamonds, no Diamond tokens ever were developed, and Diamond investors received no tokens. Zaslavskiy moved to dismiss the indictment, arguing that the REcoin and Diamond token sales did not involve securities and, consequently, were beyond the reach of the federal securities laws. The Govern- ment argued that the investments made in REcoin and Diamond were investment contracts under the Howey test and, therefore, securities as defined by the federal securities laws. The district court found that whether a “transaction or instrument” – particularly a novel transaction or instrument such as a digital token – “qualifies as an investment contract is a highly fact-specific inquiry.” The district court held that a reasonable jury could conclude that the facts alleged in the indictment satisfied each element of the Howey test, because the facts alleged suggested that purchasers invested money to partici- pate in Zaslavskiy’s alleged schemes for the purpose of sharing pro-rata in the schemes’ profits, and such profits were expected to be derived solely from Zaslavskiy’s and his co-conspirators’ efforts. The court also concluded that the federal securities laws were not unconstitutionally vague as applied to Zaslavskiy: “The Indictment describes REcoin and Diamond as schemes devised by Zaslavskiy and his co-conspirators to use the money of others on the promise of profits. The [federal securities laws] are intended to prevent just that: their aim is to protect the American public from speculative or fraudulent schemes of promoters like Zaslavskiy and ensure full and fair disclosure with respect to securities. . . . The Indictment plainly alleges that REcoin and Diamond were two of the countless and variable schemes that in the ever-evolving com- mercial market, fall within the ordinary concept of a security. At this juncture, Zaslavskiy’s contrary charac- terizations are plainly insufficient to by-pass regulatory and criminal enforcement of the securities laws.” Zachary Coburn, Securities Exchange Act Release No. 84553 (Nov. 8, 2018) On November 8, 2018, the SEC announced that it had settled charges against Zachary Coburn, the founder of EtherDelta, a digital token trading platform. This was the SEC’s first enforcement action based on findings that such a platform operated as an unregistered national securities exchange. EtherDelta provided a market- place for pairing buyers and sellers of digital assets through the combined use of an order book, a web- site displaying orders, and a smart contract run on the The district court held that a reasonable jury could conclude that the facts alleged in the indictment satisfied each element of the Howey test, because the facts alleged suggested that purchasers invested money to participate in Zaslavskiy’s alleged schemes for the purpose of sharing pro- rata in the schemes’ profits, and such prof- its were expected to be derived solely from Zaslavskiy’s and his co-conspirators’ efforts.