Crypto investors and enthusiasts finally had something to shout about in a U.S. court. A Federal Judge actually thwarted the attempt of the SEC to step on a lowly Initial Coin Offering, before it had even begun issuing final tokens for sale. The SEC has stated publicly that one of the primary objectives was to rid cryptocurrencies of gross misconduct within its space, especially having to do with ICOs. The judge, however, disapproved of the apparent misconduct of the SEC, based on the “facts and circumstances” of this case, and denied its bid for a temporary injunction.
While the celebration may have been over the finer points of law, the SEC had actually achieved what it truly wanted. Its Temporary Retraining Order (TRO) had already done the trick. Blockvest, the ICO caught in the crosshairs of the SEC, shut its doors, perhaps, never to see the light of day once more. Its offering materials contained several gross misrepresentations, enough to make the firm highly suspect in the first place. One lawyer’s take summed it up: “The SEC won the war but lost the preliminary-injunction battle by nipping this ICO in the bud.”
What exactly did Blockvest do to raise the ire of the SEC? One report was quite revealing: “Blockvest was preparing for an ICO of “BLV” tokens. Its website touted the endeavor as the “first licensed and regulated tokenized cryptocurrency exchange and index fund based in the United States,” and showed pictures of the seals of the SEC, CFTC, NFA and others. It also claimed to be regulated by the fictitious “BEC” (Blockchain Exchange Commission), which not coincidentally appeared to share the same Washington address as the SEC.”
Any traditional security offering that displayed government seals and claimed to be regulated when it was not would never get past square one with the authorities. Exaggerations are endemic in ICO marketing strategies, but are violations when it comes to securities law. You are not allowed to deliberately mislead investors by claiming greatness before it is achieved or by implying associations with agencies that might bring it a level of credibility in the eyes of the unsuspecting public. It is no wonder that SEC officials wanted to step harshly on Blockvest.
If it appeared to be such a locked and shut case, where did the SEC go astray? It goes back again to the facts and circumstances. As it turned out, Blockvest was conducting early testing, having sold 32 tokens to friends of the operator, who were happy to help him with his new venture. By shuttering the operation at this stage with its TRO, the SEC shot itself in the foot, so to speak. In order for an injunction to be issued, they would need to prove that investors had “expectations of profits”, which testers did not have, and that, if the company continued on its way, then there might be a further “likelihood of continuing harm,” an impossibility since the SEC had closed the operation.
Since the SEC had tied its own hands, the court had to rule in the favor of the defendant, a Pyrrhic victory, you might say. The president and chief legal officer at Blockchain Marco Santori, foresees a troubling precedent going forward: “As my colleagues in twitter law have stated, the SEC pretty much got what it wanted with regard to Blockvest. No bloody noses here. The precedent, though, is lasting, and definitely raises the bar for any plaintiff – public or private – seeking to sue ICO issuers. It’s going to be more complex, I think, than any of us realized. And a lot gets lost in the world of ICOs, like remembering.”