Just this week, a United States District Judge for the Eastern District of New York told a defendant in a criminal case that he was out luck with the claim there was no securities fraud because he was selling  digital tokens.  See United States v. Zaslavskiy, Case Number 1:17-cr-00647 (E.D.N.Y.).

The defendant tried to argue that the digital tokens were not securities.  The court was simply not buying what the defendant was now selling.  The case involved claims the defendant bilked investors in ICOs.  The court refused to say that the tokens were not securities at such an early stage in the case, and believed it was up to the jury to make that determination.

This decision highlights the very fact intensive nature of determining if the federal securities laws apply to these types of digital token fraud claims.  Essentially, the court was relying upon the United States Supreme Court’s SEC v.  W. J. Howey Co., 328 U.S. 293 (1946), test to delineate the respective position these tokens held within the ambit of the federal securities laws.  Ultimately, the court believed there was enough evidence to indicate it was a question of fact for the jury.

One of the big takeaways from this case is that courts, at least, initially, seem to be reluctant to claim crypto instruments are not securities.  It almost appears that, like everyone else, courts such as the one in the EDNY are looking for more guidance, and are reluctant to make any major pronouncements about the status of such items as digital tokens.

Recently, the SEC’s Director of Corporation Finance provided long overdue insight on cryptocurrencies.  In particular, he indicated that Bitcoins, Etherium, and other such coins functioning on certain decentralized platforms are not securities.  Our partner, Kristen Howell, authored a fascinating and informative alert on this topic.  See https://www.foxrothschild.com/publications/sec-bitcoin-is-not-governed-by-securities-laws/.  We commend it to anyone interested in this area.

Essentially, the SEC Staff has taken the position that, various cryptocurrencies operating from a central control group, who target passive investors, will be engaging in a securities offering while less centralization focusing in on purchasing goods or services will be less likely to be considered a security.  The SEC Staff also suggested that those interested in this field should consider seeking formal interpretive or no-action letter guidance so as to avoid the potential pitfalls.  The SEC Staff also indicated that securities registration may end up being required if there is a central group/promoter offering an increase in value; raising excess funds that are more than necessary for the actual network; having purchasers looking for a greater return than the current value; and a directed sales effort.

Thus, it is critical to seek out legal counsel before engaging in cryptocurrency networks and offerings.