{"id":21427,"date":"2018-09-12T19:09:47","date_gmt":"2018-09-12T19:09:47","guid":{"rendered":"http:\/\/ci027cfe6620012697"},"modified":"2018-09-12T19:09:47","modified_gmt":"2018-09-12T19:09:47","slug":"federal-judge-applies-long-established-securities-law-icos","status":"publish","type":"post","link":"https:\/\/bitcoinmagazine.com\/culture\/federal-judge-applies-long-established-securities-law-icos","title":{"rendered":"Federal Judge Applies Long-Established Securities Law to ICOs"},"content":{"rendered":"
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Does a decades-old securities law apply to an initial coin offering (ICO)? In a case that represents the first time securities laws have been applied to cryptocurrencies, a district judge says it may.<\/p>\n

On September 11, 2018, in a district courthouse in Brooklyn, New York, Judge Raymond Dearie ruled<\/a> that two ICOs were securities, based on established laws that govern the financial instruments. His decision does not imply that all ICOs are securities, but that simply calling a token a \u201ccurrency\u201d does not preclude it from being classified as a security. <\/p>\n

Turning back a few pages<\/a>, in October 2017, businessman Maksim Zaslavskiy was accused of misleading investors in two separate ICOs. He raised about $300,000 in a cryptocurrency called REcoin, which he claimed was backed by real estate, and a cryptocurrency called Diamond, which he claimed was backed by diamonds. In truth, no real estate nor diamonds backed either of the coins, and Zaslavskiy was charged in a criminal complaint with conspiracy and two counts of securities fraud \u2014 charges that carry up to five years in jail and a fine. <\/p>\n

Zaslavskiy moved to have the charges dismissed. He argued that his ICOs were not securities, but \u201cthe exchange of one currency for another,\u201d and that securities laws are too \u201cunconstitutionally vague\u201d to be applied to his case. <\/p>\n

Cornell law professor Robert Hockett calls the insistence that the laws are vague a \u201cHail Mary.\u201d \u201cIt is a fallback argument,\u201d he told Bitcoin Magazine<\/em>. \u201cAt first the defendant says the law is clear in that it clearly does not apply, but then he effectively says, \u2018I have no way of knowing what I can do because the law is unclear.\u2019\u201d<\/p>\n

Judge Dearie found the laws clear enough. He pointed out that laws are meant to be interpreted flexibly. He then went on to determine that the two ICOs in question were \u201cinvestment contracts\u201d by applying the Securities Exchange Act of 1934, one of the most important pieces of legislation governing securities, and the Howey Test, a checklist regulators use to determine if an asset is a security. <\/p>\n

Specifically, the Howey Test determines that a transaction represents an investment contract if “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” According to case documents, Judge Dearie found that REcoin and Diamond investors \u201cundoubtedly expected to receive profits in their investments.\u201d <\/p>\n

In his arguments, Judge Dearie also referenced the DAO Report<\/a>, an investigative report issued by the U.S. Securities and Exchange Commission (SEC) in July 2017 claiming that tokens sold on an Ethereum-based investment fund were securities, and public statements made<\/a> by SEC Chairman Jay Clayton<\/a> on cryptocurrencies and ICOs in December 2017. At that time, Clayton noted that \u201csimply calling something a \u2018currency\u2019 or a currency-based product does not mean that it is not a security.\u201d<\/p>\n

\u201cCombined with statements the SEC chairman made previously, yesterday\u2019s decision lends further credence to what many of us believe, which is that offered coins will count as investment contracts and hence securities,\u201d said Hockett. \u201cThe SEC has made noises that ICOs were securities, but up until now, there has been no official legal ruling declaring they were.\u201d <\/p>\n

The case still has to go to trial and, ultimately, it will be up to a jury to decide whether the ICO in question was a security. Still, Hockett said: \u201cI really doubt an appellate court will overturn the district court\u2019s ruling.\u201d <\/p>\n

ICOs have been a major source of controversy in the crypto space. So far, about $20 billion<\/a> has been raised in ICOs, most of that in the last two years. In a talk<\/a> at MIT in April 2018, Gary Gensler, former chairman of the Commodity and Futures Trading Commission (CFTC), another regulatory body that has weighed in on ICOs, noted \u201csignificant noncompliance\u201d with securities laws in the cryptocurrency space. \u201cMany initial coin offerings, probably well over a thousand, many crypto exchanges, probably 100 to 200, are basically operating outside of U.S. law,\u201d he said. <\/p>\n","protected":false},"excerpt":{"rendered":"

Does a decades-old securities law apply to an initial coin offering (ICO)? In a case that represents the first time securities laws have been applied to cryptocurrencies, a district judge says it may.<\/p>\n","protected":false},"author":3488,"featured_media":21428,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[33],"tags":[3240,213,219,1487,1057],"class_list":{"0":"post-21427","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-culture","8":"tag-icos","9":"tag-legal","10":"tag-regulation","11":"tag-securities","12":"tag-tokens"},"author_data":{"id":3488,"name":"Amy Castor","nicename":"amy-castor","avatar_url":"https:\/\/bitcoinmagazine.com\/wp-content\/uploads\/2024\/12\/amy-castor-promo-image-96x96.jpg"},"featured_image_url":"https:\/\/bitcoinmagazine.com\/wp-content\/uploads\/2024\/11\/miami-judge-rules-bitcoin-is-not-money-dismisses-money-laundering.jpg","_links":{"self":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/posts\/21427","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/users\/3488"}],"replies":[{"embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/comments?post=21427"}],"version-history":[{"count":0,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/posts\/21427\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/media\/21428"}],"wp:attachment":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/media?parent=21427"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/categories?post=21427"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/tags?post=21427"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}