SEC v. Blockvest, LLC, No. 3:18-cv-02287-GPC-MSB (S.D. Cal. Feb. 14, 2019)
Judge Gonzalo P. Curiel granted the Securities and Exchange Commission’s (SEC) motion for partial reconsideration of the court’s November 2018 order denying a preliminary injunction against Blockvest for violating Section 17(a) of the Securities Act. In its original November 2018 order, the court found that the SEC had failed to make the requisite showing that Blockvest’s “BLV” tokens were “securities” under the federal securities laws because there was insufficient evidence that Blockvest’s early test investors had invested money in the tokens with an expectation of profits. After the SEC moved for reconsideration, however, Judge Curiel granted the motion for preliminary injunction, holding that the SEC had sufficiently established a prima facie case that Blockvest’s promotional materials concerning the initial coin offering (ICO) of its BLV tokens constituted an offer of unregistered securities in violation of
To obtain a preliminary injunction, the SEC first had to establish a prima facie case of a violation of federal securities laws. Here, the SEC alleged that Blockvest violated Section 17(a) by offering unregistered securities.
In analyzing whether the SEC sufficiently made the requisite showing for purposes of a preliminary injunction, the court first addressed whether the SEC had made out a prima facie case that the BLV tokens constitute “securities” within the meaning of the federal securities laws. Section 2(a)(1) of the Securities Act defines “security” to include, inter alia, “any note, stock, treasury stock ... bond ... [or] investment contract.” 15 U.S.C. § 77b(a)(1). The district court employed the U.S. Supreme Court’s three-part test from SEC v. W.J. Howey Co., 328 U.S. 293 (1946), to determine if the BLV tokens could be considered an “investment contract.” That three-part test requires (1) an investment of money (2) in a common enterprise (3) with an expectation of profits produced by the efforts of others. The district court emphasized that, “[i]n determining whether a transaction constituted a ‘security’ based on an offer and/or sale to investors, the Ninth Circuit looks to the specific promotional materials presented to the ‘investors.’” The court also recalled the Supreme Court’s guidance in SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 352-53 (1943): “The test [for determining whether an instrument is a security] ... is what character the instrument is given in commerce by the terms of the offer, the plan of distribution, and the economic inducements held out to the prospect.”