U.S. District Court Rules That Digital Tokens in Initial Coin Offerings May Not Constitute Securities

At the SEC’s request, the U.S. District Court for the Southern District of California (Court) recently issued a temporary restraining order stopping an allegedly fraudulent initial coin offering (ICO). The SEC complaint alleged that, to give legitimacy to the ICO, the defendants created a bogus self-regulatory agency modeled on the SEC; falsely claimed that the offering was approved by the SEC and exempt from registration; and engaged in other misleading conduct. Following a hearing, the Court recently denied the SEC’s motion for a preliminary injunction. This article analyzes the Court’s order denying the motion. For more on SEC enforcement efforts in the digital currency space, see “SEC Enforcement Division Annual Report Emphasizes Continuing Focus on Retail Investors, Individual Accountability, Cyber Misconduct and Digital Assets” (Dec. 6, 2018); “Unregistered Crypto Fund Hit With Multiple Securities Laws Violations by SEC” (Oct. 18, 2018); and “SEC Cyber Unit Files Charges Against Allegedly Fraudulent ICO” (Jan. 11, 2018).

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