Initial coin offerings (ICOs) involve the selling of securities and are thus covered by the U.S. Securities and Exchange Commission’s (SEC’s) mandate, a Brooklyn court has ruled.
In throwing out defendant Maksim Zaslavskiy’s motion to dismiss fraud charges against him, Judge Raymond Dearie of the New York Eastern District Court wrote, “[T]he Exchange Act and SEC Rule 10b-5, under which Zaslavskiy is charged, are not unconstitutionally vague as applied to this case. Zaslavskiy’s motion to dismiss is denied. The case will proceed to trial.”
Zaslavskiy had allegedly taken funds from some 1,000 investors with the advertising of ‘REcoin,’ purportedly backed by real estate, and later, ‘Diamond,’ which he had claimed was backed by diamonds and agreements with diamond retailers. “In the end, REcoin investors received no ‘digital asset[s], token[s] or coin[s]’ and no REcoin token or coin was ever developed… Zaslavskiy purchased no diamonds. And investors who transferred funds from REcoin to Diamond never received coins or tokens in exchange,” the ruling read.
The court cited the “Howey Test,” the ruling of which states that the definition of a security “embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.” Based on such a definition, the court said, the investment contract between Zaslavskiy and his investors is covered by the SEC.
Zaslavskiy had argued that his products were currencies rather than securities, therefore beyond the SEC’s scope. But the court said that Zaslavskiy “overlooks the fact that simply labeling an investment opportunity as ‘virtual currency’ or ‘cryptocurrency’ does not transform an investment contract—a security—into a currency.”
“Stripped of the 21st century jargon… the challenged Indictment charges a straightforward scam, replete with the common characteristics of many financial frauds,” the Brooklyn court ruling read.
The SEC first reported on Zaslavskiy’s dealings in September 2017. It remains to be seen how the ruling affects cryptocurrencies in general, which are classified by the Commodity Futures Trading Commission (CFTC) as commodities, even though cryptocurrency exchanges need to be registered with the SEC.