Today, a federal judge ruled that U.S. securities laws cover initial coin offerings after possibly passing the Howie test. Below, experts from blockchain legal advisory Ketsal Consulting, AngelList-backed crowdfunding platform Republic, and deep tech venture capital firm COSIMO Ventures comments on the ruling from their various perspectives.
Generally, the experts agree that the ruling does not affect the ICO market participants very much. At the end of the day, ICOs will be judged on a case-by-case basis, depending mostly on whether it passes the HOWIE test.
James Blakemore, Principal of Blakemore Fallon and Co-Founder of Ketsal Consulting, the professional consulting arm of leading blockchain-focused law firm Blakemore Fallon, discusses the preliminary nature of this ruling:
“Today’s ruling should neither comfort nor concern legitimate ICO market participants: the court explicitly declined to decide whether the ICOs at issue qualified as securities offerings, and called any debate on that front “premature.”
The court’s order denied a pretrial filing known as a “motion to dismiss”—here, the defendant moved to dismiss the government’s indictment against him. At this early stage, the court was called on to decide only whether the government’s allegations, assumed for now to be true, set forth a crime. Any evidence that the alleged scheme was, in fact, a securities offering made in violation of the law will be provided at a later date. Only then will a jury or the court decide what actually happened in this case, including the status of the ICOs.
In effect, Judge Dearie ruled that if the facts are as the government says they are, and the defendant’s operation was a “straightforward scam” meeting the elements of the Howie test, the defendant could, after a trial, be held liable under the securities laws. But we already knew that. At best the ruling is a reminder to issuers to comply with the securities laws and to investors to be wary of potential scams.”
Kendrick Nguyen, Co-Founder and CEO of Republic, a token pre-sale platform that has regulatory approval for non-accredited investors, on the implication of this ruling on the ICO market and the regulatory status of tokens as securities:
“This should not be a huge blow to the ICO market whatsoever. Everyone is very well aware that if you are offering future returns, your offering is most certainly a security. While utility tokens can exist, the facts and circumstances of this case make it clear that this was a series of improper securities transactions, irrespective of the nature of the tokens.
This ruling should have no implications on non-fraudulent crypto projects seeking funding. The reason Judge Dearie is bringing the hammer down on the defendants, in this case, is due to the fact that the defendant was running a fraudulent securities offering. Zaslavskiy was offering digital tokens in both a supposed Real Estate and Diamond equity business. In no way was the structure of these digital tokens tieing investors to any stake in either of these businesses.
This is also a classic case of tokenizing assets which we’ve been seeing at Republic quite a lot. We’ve seen potential clients that want to tokenize their existing businesses. We are framing these offerings as ‘security tokens’ from the start. They are specifically intended to be an investment, with an expectation of future return, and should be classified as such.
It is hard to say what actions the SEC should or should not do in a market as nascent as digital assets. They’ve done a tremendous job in monitoring all coin offerings while simultaneously trying to build the regulatory framework around the industry. In any new market, there are going to be fraudulent actors. The most effective way to protect investors against these parties will be to make swift and decisive action to reprimand them once they have been discovered.”
Ciarán Hynes, Managing Partner at COSIMO Ventures, a leading global venture capital firm that focuses on deep technology including blockchain, AI, AR/VR, IoT and cybersecurity, comments on the narrow scope of the ruling:
“This ruling copper-fastens the need for regulatory clarity when it comes to ICOs and capital raising in the blockchain space. It is clear that some ICOs and STOs have to comply with securities laws. If you create a token that meets the Howie test, you are likely to be treated by the courts as a security. But this ruling says nothing about crypto projects that do not meet the Howie test.
The judge is determining that this specific ICO has breached securities laws because of the nature of the offering. So this ruling really doesn’t change the legal framework the industry is operating under now. If established properly and within the rules, this ruling should not affect other crypto projects unless they are similar in nature to this case.”