On February 14, 2019, the Court in Securities and Exchange Commission v. Blockvest, LLC (S.D. Cal.)¹ granted the SEC’s motion and imposed a preliminary injunction against defendants in connection with Blockvest’s token offering. As we previously reported (The SEC Does Not Always Win – At Least For Now, December 3, 2018), in November 2018 the court had denied the SEC’s request for a preliminary injunction against defendants, finding that the SEC had failed to demonstrate that defendant Blockvest’s tokens related to the testing program were “securities” under the Howey test because they had not been distributed to the testers and the testers did not believe that they were making an investment. The SEC subsequently moved the court to reconsider that decision.

In its February 14 ruling, the court granted the SEC’s motion and imposed a preliminary injunction. While the court did not change its analysis of Blockvest’s relationship with its testers, it held that Blockvest’s dissemination of information about its planned offering and token on its website, by distributing a “Whitepaper” about the offering, and in social media posts constituted an offer to sell unregistered securities under Section 17(a) of the Securities Act – even though Blockvest had not actually attempted to sell the tokens to the public. That is, first the promotion of the Blockvest token in these materials fit the definition of “security” under the Howey test, as the materials described an investment of money into a common enterprise. Second, the federal securities laws define “offer” broadly, including the dissemination of information intended to condition the public, even if there has been no solicitation of an actual sale. The court also rethought its willingness to rely on defendants’ representation that they would not proceed with the ICO on the basis of misconduct by the defendants in the litigation itself.

Although the acts alleged by the SEC in Blockvest are extreme, the practical takeaway for ICO issuers from the court’s decision is the need to be continuously mindful of securities law compliance in any presentation of information concerning the ICO, whether to known potential investors or to the public through websites or social media postings.

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¹ In October 2018, in Securities and Exchange Commission v. Blockvest, LLC (S.D. Cal.), the SEC claimed that Blockvest LLC and its principal, Reginald Buddy Ringgold, had violated provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 in connection with Blockvest’s planned Initail Coin Offering (ICO). According to the SEC, Blockvest planned a $100 million ICO launch in December 2018 and had engaged in presales. Defendants allegedly falsely claimed on their website and in other materials that the ICO had been registered, approved or endorsed by the SEC, the Commodity Futures Trading Commission and the National Futures Association, and the website even identified a fictitious regulatory agency, the “Blockchain Exchange Commission,” complete with fake government seal, logo and mission statement. Defendants by contrast claimed that no ICO interests had been sold and that there had only been limited testing of their system by testers known to them. Defendants represented that they would give the SEC thirty days’ notice before proceeding with any offering of Blockvest’s tokens.