17 BLOCKCHAIN, TOKEN SALES, AND SEC GUIDANCE GOODWIN Ethereum blockchain. The smart contract was coded to validate order messages, confirm terms and condi- tions of orders, execute paired orders, and direct the distributed ledger to be updated to reflect trades. The SEC found that over an 18-month period, EtherDelta’s users executed more than 3.6 million orders for tokens, including unidentified tokens that constituted securities under the federal securities laws. Without admitting or denying the SEC’s findings, Coburn settled with the SEC, and agreed to pay $300,000 in disgorgement, $13,000 in prejudgment interest, and a $75,000 civil penalty. The SEC’s investigation concerning the matter is ongoing. Paragon Coin, Inc., Securities Act Release No. 10574 (Nov. 16, 2018) On November 16, 2018, the SEC announced that it had settled charges against two companies that conducted unregistered tokens sales in 2017, including Paragon Coin, Inc. (“Paragon”). Paragon’s token sale raised approximately $12 million in digital assets to develop and implement a business plan to add blockchain technology to the cannabis industry and work toward legalization of cannabis. The settlements included three primary components. First, without admitting or denying the SEC’s findings, each company was required to pay a civil penalty of $250,000. Second, within 90 days of the settlement, each company is required to register its tokens as securities under Section 12(g) of the 1934 Act and maintain such registration for at least one year. Third, each company is required to conduct a claim process which will allow token purchasers to seek a refund of their purchases. SEC v. Blockvest, LLC, et al., Case No. 18-cv- 2287-GPB, 2018 WL 6181408 (S.D. Cal. Nov. 27, 2018) Blockvest, LLC (“Blockvest”) was established to function as a cryptocurrency exchange, but has not become op- erational. Blockvest allegedly conducted a “pre-sale” of tokens in March 2018. Blockvest allegedly represented that its token sale was registered and approved by the SEC, and used the SEC’s seal on its website. Blockvest claims that it never actually sold any tokens, but rather, conducted testing of its platform by accepting funds from 32 “testers.” The SEC brought an enforcement action against Blockvest and its officers and founders, asserting claims under Sections 5 and 17 of the 1933 Act, and Section 10(b) and Rule 10b-5 of the 1934 Act. The SEC moved for a preliminary injunction seeking to freeze defendants’ assets. The district court denied the SEC’s motion, concluding that the SEC had not estab- lished a prima facie violation of federal securities laws because the SEC had not carried its burden of showing that Blockvest’s tokens were securities. In particular, the district court concluded that the parties’ competing evidence of what, if anything, the 32 testers “relied on, in terms of promotional materials, information, econom- ic inducements or oral representations . . . before they purchased the test . . . tokens” precluded the court from determining that the testers had “invested” money, as required under Howey’s first prong. Nor did the district court find any evidence in the record supporting the SEC’s assertion that the testers expected to profit, as required under Howey’s second prong. On February 14, 2019, however, the district court grant- ed the SEC’s motion for partial reconsideration. Setting aside what the 32 testers relied on, the district court held that the SEC had alleged more broadly a prima facie violation of Section 17 of the 1933 Act. In particular, focusing on the breadth of the term “offer” in the 1933 Act, the district court held that the SEC had alleged that Blockvest “offered” unregistered securities through al- legedly misleading promotional materials that Blockvest had posted on its website and through social media accounts. With respect to the Howey test, the district court concluded that the promotional materials satisfied Howey’s first prong because they asked investors to provide digital currency in exchange for tokens. The district court also concluded that Howey’s other ele- ments were satisfied because the promotional mate- rials promoted a common enterprise through which “passive” investors expected to profit. Based largely on these conclusions, the district court preliminarily enjoined defendants from violating Section 17(a) of the 1933 Act, and certain defendants moved to dismiss on December 21, 2018. A decision on the motions to dismiss is expected in early 2019. Other defendants, including Centra Tech, did not respond to the com- plaint, and default judgments were entered as to those defendants in January 2019. 1 AirFox was a Goodwin client.