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US Judge Rules ICOs Covered by Securities Law

After a long period of silence and uncertainty, the United States government has stated that at least two initial coin offerings (ICOs) are not exempt from security laws.

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After a long period of silence and uncertainty, the U.S. government has stated that at least two initial coin offerings (ICOs) are not exempt from security laws.

Howey vs SEC

The ruling comes after ICO participants from Recoin and Diamond Reserve Club filed a federal case against the projects’ founder Maksim Zaslavskiy for misleading investors, who said Zaslavskiy lied about the tokens being backed by diamonds and real estate.

While Zaslavskiy asserts that U.S. security law is “unconstitutionally vague,” Judge Raymon Dearie believes the status of an asset being a security has “long been settled” through the Howey test.

The Howey Test was developed during the Supreme Court ruling Howey vs SEC in 1946 and claims that “investment contracts” determine if an asset should be considered a security. If an asset is ruled a security then it is due for certain regulations.

In an ICO, for example, participants agree to send funds (typically in Bitcoin or Ethereum) in exchange for future tokens. According to the U.S. government, this qualifies as an investment contract.

In an interview with Bloomberg, Peter Henning, a professor at Wayne State University’s law school in Detroit, said:

“This ruling affirms the SEC’s position that it has authority over ICOs and that market manipulation and anti-fraud provisions in the law apply. The defense here was arguing that it’s not a security, but the judge has rejected that claim, saying that this case can fit under the securities laws, and that’s an important first step.”

This ruling isn’t a surprise to many, as a majority of the crypto community has come to the consensus that ICOs are often securities.

This news marks big implications on the future of cryptocurrency, as nearly all projects began as ICOs. Currently, the only cryptocurrencies with a clear SEC ruling as commodities are Bitcoin and Ethereum due to the extent of their decentralization.

While Ethereum conducted an ICO in 2014, the SEC stated that, although the cryptocurrency was at one point a security, it’s current decentralized state exempts it.

The decision of ICOs serving as securities is not final and has only been ruled in this specific case. The final decision will come from a jury in the coming weeks and it’s likely that whatever the outcome is, it will be appealed to a higher court.

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Posted In: ICOs, Regulation
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