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While the SEC continues to target fraudulent crypto-projects,
we've seen a marked increase in the number of class actions
targeting a wider-range of ICOs.1 The crypto-industry is
watching these cases intently; awaiting the judiciary's play in
the on-going game of "Are Crypto-Tokens Securities?".
Earlier this week, United States Magistrate Judge Andrea M.
Simonton (Southern District of Florida) laid an early card in
Rensel v. Centra Tech, Inc.2 Although the
Report and Recommendation3 is not the in-depth analysis
of a functional, utility-heavy token the industry desperately
needs, it nonetheless offers some food for thought.
Analyzing the plaintiffs' motion for a temporary restraining
order, the court asked whether the plaintiffs had a likelihood of
succeeding on the merits of their securities fraud claims. Part of
that analysis involved applying the Howey Test4
to determine whether Centra Token ("CTR"), the token
powering Centra Tech's purported "crypto-debit card"
is a security. Judge Simonton had little trouble concluding that
the token-purchasers met the first two Howey-prongs
because the plaintiffs invested USD, Ether, and Bitcoin in an
operation they had little control over. Moreover, "Because the
success of Centra Tech and the Centra Debit Card, CTR Tokens, and
cBay that it purported to develop was entirely dependent on the
efforts and actions of the Defendants," the court also
concluded that CTR satisfied the remaining Howey prong
(that there be an expectation of profits derived solely from the
efforts of others). Ultimately, Judge Simonton concluded that CTR
meets the requirements of an investment contract and, thus, for
now, the unregistered Centra Tech ICO could have violated the
Securities Act of 1933.
However limited, the Judge Simonton's analysis is
interesting for several reasons. First, the court focused on how
the defendants' efforts impacted the success of not just the
CTR token, but also the products and applications operating around
CTR, namely the cBay marketplace and the Centra Debit Cart.
Second, rather than inquiring whether the defendants themselves
created an expectation of profits, the court was satisfied that
such an expectation existed, regardless of its origin. Ultimately,
the precedential value of this opinion is limited because the
defendants conceded for the purposes of the motion that CTR are
securities. In an industry searching for clarity, however,
interested parties in all corners will undoubtedly rely on
Rensel to make their respective points. With time and
repetition, the contours of the Howey test as it applies
to crypto-tokens will begin to take shape; whether other courts
should follow the path laid Rensel remains to be seen.
The parties have the opportunity to lodge objections to Judge
Simonton's Report and Recommendation before it is ultimately
considered by United States District Judge James Lawrence King.
Footnotes
1 See e.g., Jacob Zowie Thomas Rensel v. Centra Tech,
Inc., No. 17-CV-24500 (S.D. Fla.); Coffey v. Ripple Labs
Inc. et al., No. 3:18-cv-03286 (N.D.C.A.); GGCC LLC v.
Dynamic Ledger Solutions Inc. et al., No. 5:17-cv-06779, (N.D.
Cal.).
2 Rensel, v. Centra Tech, Inc., No. 17-CV-24500,
2018 BL 227097 (S.D. Fla. June 25, 2018).
3 A magistrate's report and recommendation is subject
to objections by both parties. After the parties object, the report
and recommendation goes to the assigned district court judge who
will make the final decision whether to reject, adopt, or adopt
in-part the magistrate's decision.
4 Under the so-called Howey Test, a particular
scheme is considered a security if it qualifies as an investment
contract whereby a person [1] invests money in [2] a common
enterprise and [3] is led to expect profits [4] solely from the
efforts of the promoter or a third party. SEC v. W.J.
Howey, 328 U.S. 293 (1946). Although some courts apply this as
a three-prong test, the same essential elements are
required.
This article is presented for informational purposes only
and is not intended to constitute legal advice.
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