On February 14, 2019, the Southern District of California entered a preliminary injunction prohibiting Blockvest, LLC (“Blockvest”), a company set up to exchange cryptocurrencies, and its founder, Reginald Buddy Ringgold, III (“Ringgold”), from violating an anti-fraud provision of the federal securities laws. The decision came following the court’s initial denial of a motion for preliminary injunction filed by the U.S. Securities and Exchange Commission (“SEC”) last November, when the SEC sought an injunction freezing Blockvest’s assets and barring it from proceeding with a planned initial coin offering (“ICO”) and any other securities sales.
According to the SEC’s complaint, Blockvest and Ringgold offered and sold unregistered securities in the form of digital assets called “BLVs” through Blockvest’s website, whitepaper, and social media accounts and misrepresented that their ICO was “registered” and “approved” by the SEC despite receiving no approval, authorization, or endorsement from the SEC. The SEC also alleges that defendants falsely claimed their ICO had been approved or endorsed by the Commodity Futures Trading Commission and the National Futures Association, and promoted the ICO with a fictitious regulatory agency they created—the “Blockchain Exchange Commission”—using a seal similar to the SEC’s and the same address as the SEC’s headquarters.
Last November, the court denied the SEC’s motion for a preliminary injunction because there were disputed factual issues as to the nature of what was offered to 32 “test investors” who used the Blockvest exchange platform and 17 individuals who loaned or invested money in Rosegold Investments LLP (“Rosegold”), which in turn invested in Blockvest. Specifically, Ringgold’s testimony and declarations from some of the 32 test investors indicated that they did not intend to make an investment and were merely testing the Blockvest exchange platform. Ringgold’s testimony also indicated that the 17 individuals who loaned or invested money in Rosegold were really making personal loans to him and Blockvest’s CFO. At the time, the court did not directly address an alternative argument made by the SEC that the promotional materials on Blockvest’s website, whitepaper, and social media accounts constituted an offer of unregistered securities.
In granting the motion for partial reconsideration, the court reaffirmed its previous ruling regarding the 32 test investors and 17 individuals who loaned or invested money in Rosegold, but credited the SEC’s alternative theory. Applying the definition of an investment contract set forth in the Supreme Court’s decision in SEC v. W.J. Howey Co., the court found that BLVs are securities because Blockvest’s website and whitepaper urged people to pay for tokens with digital or other currency, provided that any funds raised would be pooled together and later divided among investors by a profit sharing formula, and described purchases of BLVs as being a “passive” investment that would generate “passive income.” The court also rejected defendants’ arguments that there was no offer of securities because there was no manifestation of intent to be bound, explaining that there is no requirement that performance be possible or that the issuer be able to legally bind a purchaser.
This decision reinforces that the focus of any analysis of whether digital currencies are securities remains on how those digital currencies were marketed and not on the subjective beliefs of those who acquired them.