Verdict undermines SEC control over crypto

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A lawsuit over an alleged crypto Ponzi scheme dating back to 2014 may have dealt a big blow to the argument of the United States Securities and Exchange Commission that almost all cryptocurrencies are securities over which it has authority. .

In a decision that gives “participants in the cryptocurrency market much needed and rarely received solace,” according to law firm Troutman Pepper, a Connecticut federal jury found that four digital assets and products linked to a transaction in the ‘cryptocurrency mining were not “investment contracts” subject to federal and state securities laws.

The verdict in “Audet v. Fraser” “will have far-reaching implications” for two reasons, Troutman argued in a Nov. 22 blog post.

“First of all, Audet involved four very different crypto products similar to many other crypto or crypto related products on the market,” he said. “Therefore, some issuers of these products may conclude that, if challenged, their products would not be considered ‘securities’ and, therefore, not subject to federal and state securities laws. This can strengthen their resolve to prosecute or resist law enforcement. “

Second, it has the potential to “shift the balance of power” between the SEC and the cryptocurrency issuers it was suing for selling what the agency has claimed to be unregistered securities for several years. In many cases, the agency has forced companies that sold cryptocurrencies as part of initial coin offerings (ICOs) to pay hefty fines to avoid litigation, which can be destructive long before a verdict. be returned.

Troutman pointed to the SEC’s lawsuit against messaging service Telegram’s TON blockchain project, which raised $ 1.7 billion in a “Grams” cryptocurrency ICO. A court blocked the project pending the outcome of a lawsuit in which the judge found that the “SEC has shown a substantial probability of success in proving” that the Grams were securities. Litigation threatened to stall the project for so long that Telegram was forced to abandon it, agreeing to the agency’s request to return $ 1.2 billion to TON buyers and pay a fine of $ 18.5 million. .

See also: Telegram agrees to SEC penalty of $ 18.5 million

Since then, only one company, Ripple, has been willing to fight the SEC, saying the case has “wider implications” for the entire cryptocurrency industry. A spokesperson for Ripple declined to comment on the Audet decision.

Related News: Ripple CEO’s Confident SEC Trial Goes in the Right Direction

The SEC has sued a number of cryptocurrency issuers for selling unregistered securities over the past four years.

Gary Gensler, the new chairman of the SEC, recently announced that he considers almost all cryptocurrencies sold in ICOs to be securities. “It does not matter whether it is a stock token, a stable value token backed by securities or any other virtual product offering synthetic exposure to the underlying securities,” he said. stated in an Aug. 3 speech at the Aspen Security Forum. “These products are subject to securities laws and must operate within the framework of our securities regime.” The reason, he said, is that “usually people who buy these tokens anticipate profits.”

Asked about Audet’s verdict, an SEC spokesperson said the agency declined to comment.

No decision on fraud

The Audet c. Fraser revolved around a company called GAW Miners, whose plaintiffs alleged to have sold shares in the earnings of a hardware mining farm, initially offering “Hashlets” that gave buyers the right to a share of the crypto. -currency extracted by the operation. , then by selling “Hashpoints”, which could be converted into a digital currency called “Paycoin” which would be held in digital wallets called “HashStakers”.

The plaintiffs accused the directors of GAW Miners, Homero Joshua Garza and Stuart A. Fraser, of selling far more Hashlets than their material actually produced. Then, they said, the pair launched Hashpoints, promissory notes convertible into Paycoin, which could be locked in HashStakers wallets for up to six months in exchange for fixed returns. When the price of Paycoin started to fall, buyers were trapped by the blockade of HashStakers.

The plaintiffs’ civil case revolved around these actions violating the US Securities Exchange Act of 1934 and the Connecticut Uniform Securities Act (CUSA). To do this, plaintiffs had to prove that some or all of Hashlets, Hashpoints, HashStakers, and Paycoin were investment contracts – a term that covers stocks, bonds, and other types of securities.

Whether an investment is a security is determined by the Howey Rule, established by the Supreme Court in 1934. This defines a security as “an investment of money in a joint venture with a reasonable expectation of profit. to draw from the efforts of others. “

The jury found that none of the four products was a title, so they never ruled on the merits of the fraud charges.

Troutman argued that following the Audet verdict, “courts may be less inclined to find that a plaintiff has a ‘substantial probability of success’ in proving that a certain digital asset or product is security under Howey.” .

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