Federal Judge Rules that U.S. Securities Laws Apply to ICOs

A criminal case involving an initial coin offering (ICO) which was backed by investments and assets that allegedly don't exist could have a major impact on the entire ICO space. According to Bloomberg, a federal judge has ruled that U.S. securities laws could cover initial coin offerings. Prior to this point, the question of regulation of the contested ICO landscape has been a difficult one to answer. Now, the government may have just gained crucial authority to regulate a space with billions of dollars in cryptocurrency offerings.

A Win for the SEC

For Wayne State University law professor Peter Henning, the ruling is a win for the SEC. "This ruling affirms the SEC's position that it has authority over ICOs and that market manipulation and anti-fraud provisions in the law apply," he said. He added that "the defense here was arguing that it's not a security, but the judge has rejected that claim."

The case in question involves Brooklyn businessman Maksim Zaslavskiy. Zaslavskiy was charged with two counts of securities fraud, among other crimes, for a role in allegedly defrauding investors through two ICOs. Part of Zaslavskiy's defense rested on the assertion that the ICOs were not securities, but rather currencies. However, U.S. District Judge Raymond Dearie, who presided over the case, indicated that the jury will ultimately decide whether the ICOs in question were securities or not.

It's important to note that the judge's ruling is specific to this particular case. Dearie indicated that, "per the indictment, no diamonds or real estate, or any coins, tokens, or currency of any imaginable sort, ever existed--despite promises made to investors to the contrary. Simply labeling an investment opportunity as a 'virtual currency'...does not transform" a security into a currency.

Massive Implications

Although this ruing may not change the ICO space overnight, it does provide the SEC with an important precedent in its attempt to regulate that sphere. ICOs have become an incredibly popular (but also highly fraught) way for startups to launch their own blockchain- and cryptocurrency-related products. Investors have found ICOs to alternately make them very rich, fizzle out entirely, or be outright scams.

Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns bitcoin and ripple.

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