A judge in San Diego has turned back a request from U.S. Securities and Exchange Commission for a preliminary injunction against the backers of the Blockvest LLC's ICO. In a first federal decision relating to initial coin offering, the judge said SEC did not demonstrate that the ICO token was a security.
According to the court's decision on Tuesday this week, the court should not look to the "form" but to the "economic realities of the transaction" when making a determination on whether a token is a security or not.
Although the investors' subjective interest may have partly determined their entering into an "investment contract," the court decided to focus on what was promised or offered by the platform. The court said that SEC did not prove that the platform testers had an “expectation of profits.”
SEC had filed a complaint claiming Blockvest LLC and Founder Reginald Buddy Ringgold violated Section 10(b) of the Exchange Act and Section 17 (a) of the Securities Act in relation to fraud and offer and sale of unregistered securities. SEC argued that the company and leaders were selling alleged unregistered securities in the form of BLV tokens. This was allegedly done via an ICO issued by the startup, which is basically a cryptocurrency exchange.
Blockvest LLC, which held a pre-sale in March in addition to an April private sale and ICO in December and raised $2.5 million in 7 days during the ICO, is according to their white paper, the first licensed and regulated tokenized crypto exchange and index fund based in the United States. Hence SEC claimed that this allegation was false because it had not approved, authorized or endorsed the crypto exchange and fund as claimed. SEC argued that the exchange and fund claimed to be approved or endorsed by Commodity Futures Trading Commission (“CFTC”) and the National Futures
Association (“NFA”), which, according to SEC, was a false claim.
Ringgold said the startup did not sell any tokens to the public but raised money from family and friends and other platform testers. He said although testers put in less than $10,000, no BLV tokens were released to the public. As planned, BLV tokens were designed for testing and testers could not keep or remove the tokens from the exchange.
The plan was to issue “new utility Token BLVX on the NEM Blockchain for exclusive use on the BlockVest Exchange.” The platform was also never open for business. The investments also mainly came from Ringgold and startup's CFO while other individuals loaned out the money for the investment and did not buy tokens. SEC claimed the defendants admitted having received funds from 32 investors in promise for anticipated BLV tokens.
Ringgold claimed the company intended to comply with any possible regulation and regulatory agency. He also claimed that he had stopped efforts to proceed and agreed to not proceed with ICO until he gave SEC's counsel a 30 days' notice.
The court said that since the Securities Act prohibits not only the sale but also the offer of an unregistered, non-exempt security, the fact that purchasers choose not to accept the full offer is not valid.