One Year after the “DAO Report” Three U.S. Courts Begin to Provide Crypto-Clarity

By Clifford C. Histed and Nicole C. Mueller

One year ago today, the U.S. Securities and Exchange Commission (“SEC”) published the “DAO Report” which concluded that certain tokens issued in an initial coin offering (“ICO”) were securities under the Supreme Court decision SEC v. W.J. Howey Co.  The Report stated that whether an ICO is a security offering will depend on the facts and circumstances, including the economic realities of the transaction.  Confusion, private lawsuits, SEC enforcement actions, and even criminal prosecutions ensued, but three courts are about to provide clarity.

In March we wrote about federal criminal charges against Maksim Zaslavskiy in New York.  In a motion to dismiss, he asserted that: (1) the cryptocurrencies at issue are exempt from securities laws just as fiat currency is exempt; (2) the tokens did not satisfy the Howey test and so were not securities; and (3) the securities fraud charges, as applied to cryptocurrencies, are void for unconstitutional vagueness.  The issues have been briefed and the judge heard arguments of counsel last May.  We await the ruling.

Also pending in another New York federal court is the private securities case Balestra v. ATBCoin LLC et al.  The plaintiff sued ATBCoin for allegedly engaging in an ICO that was an unregistered sale of securities because the coins were securities under Howey but did not comply with securities laws.  The issue has been briefed, and we await the ruling.

Finally, pending in federal court in Florida is the private securities case Rensel v. Centra Tech, Inc. et al.  The complaint alleges that Centra Tech engaged in an unlawful sale of securities through an ICO.  A magistrate judge recently ruled that the coins were securities under Howey.  While the ruling is not final until approved by a district court judge, each of these cases provide an important sign that crypto-clarity is coming.