In what promises to be the start of a significant legal fight over the government’s ability to regulate initial coin offerings, or ICOs, under the federal securities laws, a Brooklyn man has moved to dismiss criminal securities fraud charges, arguing that digital coins are not “securities” within the meaning of the securities laws.
The motion was filed on February 27, 2018 by Maksim Zaslavskiy in the U.S. District Court for the Eastern District of New York. Zaslavskiy was indicted in November 2017 on securities fraud charges for allegedly seeking to dupe investors into purchasing digital coins for REcoin Group Foundation LLC (“REcoin”) and DRC World, Inc. (“Diamond”), entities that he owned and that purportedly invested in real estate and diamonds, respectively. According to the indictment, many of the claims Zaslavskiy made about REcoin and Diamond were materially false and misleading, including claims that the coins offered would be backed up by actual investments in real estate or diamonds when, in fact, they were not.
Zaslavskiy’s indictment followed a civil suit brought by the SEC in September 2017 which contained similar allegations regarding his conduct in the REcoin and Diamond ICOs, and which had resulted in a preliminary injunction suspending further ICO activity and freezing Zaslavskiy’s assets. That case, which was also filed in Brooklyn federal court, has been stayed pending the outcome of the criminal action.
In the past year the SEC has asserted its jurisdiction over the largely unregulated and increasingly lucrative market for ICOs, after holding in the DAO Report last July that any digital coins that meet the test for “investment contracts” under the securities laws would be considered securities themselves and thus subject to the requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934. Under Supreme Court caselaw, an investment opportunity constitutes an “investment contract” if there is an investment of money in a common enterprise with a reasonable expectation of profit to be derived from the efforts of others.
In the motion, Zaslavskiy argues that he cannot be charged under the securities laws because digital coins offered through ICOs are currencies, not securities, and are thus excluded from securities regulation. Next, Zaslavskiy argues that even if the coins are not currencies, the indictment fails to establish that the REcoin and Diamond coins have any of the features of “investment contracts” as set forth by the Supreme Court. And finally, Zaslavskiy argues that the securities laws are unconstitutionally vague as applied to digital coins, given the novelty of the government’s claim and the lack of clarity in the SEC’s own pronouncements on the issue.
This challenge comes just as the SEC appears poised to adopt a much more aggressive enforcement posture in this space, with news reports that the agency has recently issued dozens of subpoenas to firms involved in ICOs. Indeed, the significance of Zaslavskiy’s motion has not been lost on the SEC, which has obtained leave from the court in the criminal case to file its own brief in support of its theory that digital coins are covered by the securities laws.
The government’s response to the motion is due March 19, 2018.
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