Lawyer Stephen D. Palley has an interesting write-up at the Block about how a federal judge has ruled that ATB Coin was an unregistered security even if the token didn’t entitle buyers to profits. The Howey Test doesn’t actually require a security to be a share in a profit-gaining enterprise.
ICOs Don’t Need Formal Profit-Sharing to Qualify As Securities
A security is defined as something that earns value from the efforts of others, is a common enterprise, and has an investment of actual money. ATB Coin launched in September 2017, but the token’s value has dropped more than 85% since then. The lawsuit is based on these losses, and ATB Coin’s proprietors submitted a motion to dismiss based on multiple factors, including that plaintiffs weren’t entitled to profits from the company.
The court has made an important precedent. Even if you’re not promised profits in an ICO investment, it can still be considered a security if the Howey Test is applied reasonably. The court decided that ATB Coin is guilty of offering an unregistered security and not delivering on its promises.
To justify the assertion that plaintiffs were promised a profitable investment, the court looked to marketing materials from ATB Coin. ATB Coin is currently an active blockchain with little or no real use besides to and from some exchanges. It trades at no notable or reputable exchanges with a sum total volume, even after the recent bull swing in Bitcoin, of less than $5 million.
The other argument levied by the defendents was that the court has no jurisdiction over them. This is a dicey argument, being that the court can assert jurisdiction simply by virtue of US persons being able to invest in something.
However, to justify its authority over the defendants, the court noted that Herbert W. Hoover III, one of ATB Coin’s founders, is a New York resident, and that ATB Coin had presented itself at several crypto conferences in New York.
Citing A Non-Judicial Ruling Could Set Up Hundreds of ICO Dominoes
Most interestingly, the court relies on the SEC’s agreement in the case of the Munchee ICO, where it found that something can be a security even when profits aren’t promised. As Palley writes, the SEC isn’t a judicial body. It’s a regulatory agency with a charter and authority from the administrative branch. Now, however, a decision reached between the SEC and Munchee results in a precedent that other cases can cite. People on Twitter believe this may lead to a rash of lawsuits against ICOs which performed similarly to ATB Coin. The judge wrote in his dismissal, in part:
[S]uch a formalized profit-sharing mechanism is not required for a finding horizontal commonality.
Did not disappoint, will hopefully lead to a string of successful lawsuits against ICOs, which will be breathlessly covered by @stephendpalley exclusively on @TheBlock__ under a dedicated section… the working title “ICOh No They Didn’t”
— Jake ⬛ (@jakemcgraw) April 3, 2019
The question is not whether your offering returned great profit to investors or not, but whether or not it is an unregistered security that should not have been offered in the first place. The overwhelming majority of ICOs in 2017 were both unregistered with the SEC and had US investors. Which is to say that if the case against ATB Coin succeeds to the end (without an out-of-court settlement), a serious precedent will pose an existential risk to dozens of projects which have yet to return real value to ICO investors.