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In SEC v. Blockvest, LLC, the United States District Court for the Southern District of California examined the SEC’s argument for a preliminary injunction halting an initial coin offering, or ICO.

The complaint alleged that Defendants have been offering and selling alleged unregistered securities in the form of digital assets called BLV’s. According to the SEC, Blockvest and its promoter, Ringgold, falsely claimed their ICO has been “registered” and “approved” by the SEC and using the SEC’s seal on the website. In response, Ringgold asserted that Blockvest has never sold any tokens to the public and has only investor, Rosegold Investments LLP, (“Rosegold”) which is run by him where he has invested more than $175,000 of his own money.

According to the Defendants, Blockvest utilized BLV tokens during the testing and development phase and a total of 32 partner testers were involved.  During this testing, 32 testers put a total of less than $10,000 of Bitcoin and Ethereum onto the Blockvest exchange where half of it remains at the time of the Court’s order.  The other half was used to pay transactional fees to unknown and unrelated third parties.   No BLV tokens were ever released from the Blockvest platform to the 32 testing participants.    The BLV tokens were only designed for testing the platform and the testers would not and could not keep or remove BLV tokens from the Blockvest Exchange.

The Court examined the first prong of the Howey test which requires an investment of money.  The SEC argued that Blockvest’s website and whitepaper presented an offer of an unregistered security in violation of Section 5 of the Securities Act.  The Court noted the SEC’s argument presumed, without evidentiary support, that the 32 test investors reviewed the Blockvest website, the whitepaper and media posts when they clicked the “buy now” button on Blockvest’s website. However, the SEC and the Defendants provided starkly different facts as to what the 32 test investors relied on, in terms of promotional materials, information, economic inducements or oral representations at the seminars, before they purchased the test BLV tokens.  Therefore, because there were disputed issues of fact, the Court could not make a determination whether the test BLV tokens were “securities” under the first prong of Howey.

The second prong of the Howey test requires an expectation of profits. The Court noted no evidence was provided to demonstrate the investors’ expectation of profits.  The Court held without full discovery and disputed issues of material facts, the Court cannot make a determination whether the BLV token offered to the 32 test investors was a “security.”

Ringgold also asserted he will not pursue the ICO and will provide SEC’s counsel with 30 days’ notice in the event they decide to proceed.  As there was not a reasonable likelihood the wrong would be repeated, the SEC also failed this test for the grant of a preliminary injunction.