In a setback for the Securities and Exchange Commission, a federal district court has denied a motion for a preliminary injunction against a token issuer and its founder because the SEC failed to demonstrate that the tokens were securities. The decision does not necessarily add clarity to the question dominating the crypto-asset space - whether tokens are securities subject to the federal securities law. Rather, the court found that at the initial stage of the proceeding, before discovery, the SEC simply had not met its burden of establishing that the tokens were a security.
The case, SEC v. Blockvest LLC, arose from Blockvest’s plans announced earlier in the year to hold a private sale and subsequent presale of Blockvest tokens (“BLVs”). Blockvest later claimed (apparently falsely) that those sales raised $2.5 million. The SEC alleged that the transactions were illegal sales of unregistered securities and charged Blockvest and its founder, Buddy Ringgold III, with violating Section 5 of the Securities Act. The SEC also charged Blockvest and Ringgold with violating Section 10(b) of the Exchange Act and Rule 10b-5 for alleged misrepresentations published on Blockvest’s website. Specifically, the website claimed that the tokens were registered with, and approved by, the SEC and approved and endorsed by the Commodity Futures Trading Commission and the National Futures Association. The website also claimed that Blockvest had partnered with Deloitte Touche. Finally, Blockvest also allegedly invented a government regulator, the “Blockchain Exchange Commission,” which it implied was regulating its token issuance.
Opposing the SEC’s preliminary injunction motion, the defendants argued that no tokens were sold to the public. Rather, 32 investors had purchased tokens in a test with a total purchase of less than $10,000 in Bitcoin and Ether, and the tokens had never been delivered to the testers. The one real investor in the BLVs, the defendants argued, was an investment firm in which Ringgold and Blockvest’s CFO had invested their own money. Blockvest pointed out that the sale proceeds were deposited into Blockvest’s subsidiary, Blockvest Exchange, where half of it remains today, while the other half has been “used to pay transactional fees to unknown, unrelated parties.”
In its order denying the preliminary injunction motion, the court held that the SEC failed to establish that the BLVs were investment contracts, and therefore securities, under the Howey test. Addressing the first prong of that test, an investment of money, the court stated that it was unclear what the 32 testers had relied on in making their minimal purchases of tokens. Citing Ninth Circuit decisions, the court noted that the subjective intent of the purchasers “have some bearing on the issue of whether they entered in investment contracts.” Addressing the second prong of the Howey test, the court held that the SEC had not provided any evidence that the 32 test investors had an “expectation of profits.” Accordingly, at least for this early stage of the case, the court concluded that the SEC had failed to show the BLVs were securities and, therefore, that any securities law violation had occurred.
Although practitioners and market participants have been waiting for either the regulators or the courts to give greater clarity around the reach of the securities laws to token issuances, this decision provides at most a glimmer of such guidance. It is interesting that the court thought the subjective intent of the test purchasers was an important missing fact from the SEC’s case and was necessary to decide whether the first prong of the Howey test was satisfied. That issue could arise in most likely nearly all, if not all, token sale cases.
At the end of the day, however, the court’s the denial of the SEC’s motion for a preliminary injunction is premised on the gulf between the facts as alleged by the government (illegal unregistered sales of $2.5 million worth of tokens based on blatant falsehoods on the Blockvest website) and those presented by the defendants (only $10,000 raised from 32 testers personally known to the defendants). Practitioners and market participants will need to continue to wait for greater clarity regarding the application of the securities laws to token sales.
SEC v. Blockvest, LLC and Reginald Buddy Ringgold, III a/k/a Rasool Abdul Rahim El, Docket No. 18-cv-2287-GPB(BLM) (S.D. Cal. Nov. 27, 2018) (“Nov. 27 Order”)
 Id. at 4.
 The court noted that in SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946), “the Court defined whether an investment contract is a security under the Securities Act and held that an investment contract is ‘a contract, transaction or scheme whereby 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’.” Nov. 27 Order at 10.
 Id. at 11 quoting Warfield v. Alaniz, 319 F.2d 1015, 1021 (9th Cir. 2009).
 Id. at 13.
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