As detailed in a prior post on this blog, the United States District Court for the Southern District of California previously denied the U.S. Securities and Exchange Commission’s (SEC) request for a preliminary injunction against Blockvest, LLC and its founder and chairman Reginald Buddy Ringgold, III (Ringgold). Recently, upon reconsideration, the court changed course, finding that the SEC presented enough facts for the court to preliminarily enjoin Blockvest and Ringgold from further violating Section 17(a) of the Securities Act.
In its prior order, the court held that the SEC failed to establish the two elements needed to preliminarily enjoin Blockvest from committing future statutory violations: (1) a prima facie case of previous securities law violations; and (2) a reasonable likelihood that the wrong would be repeated. On reconsideration, the SEC successfully challenged the court’s holding on both of these elements, and persuaded the court to issue a preliminary injunction.
On Reconsideration, the SEC Established a Prima Facie Case that Blockvest Violated Section 17(a) of the Securities Act
The SEC asserted two reasons why the court should reconsider its earlier ruling that the SEC failed to establish a prima facie case that Blockvest violated securities laws: (1) the court improperly required the SEC to prove the subjective beliefs of alleged investors who purchased BLV tokens or invested in Ringgold’s business; and (2) the court erred in not considering Blockvest’s promotional materials as an “offer” of securities in and of themselves.
A subjective test or disputed facts
In opposition to the court’s original order, Ringgold argued that he did not expressly offer or sell securities; instead, he argued, he only sold test tokens or solicited investments in Rosegold, a holding company he owned. According to Ringgold, the thirty two (32) “testers” understood that they were buying BLV tokens that “were only designed for testing the platform and the testers would not and could not keep or remove BLV tokens from the Blockvest Exchange.” The Rosegold investors, Ringgold argued, were mainly friends and family that “did not care what they were investing in because they trusted [the defendant] based on their long-time familial and friend relationships.” Therefore, he argued, and the court agreed, the SEC could not make out a prima facie case for securities violations based on sales of BLV to these individuals.
On reconsideration the SEC argued that the court improperly relied on this evidence when applying the Howey test, an objective test, and effectively required the SEC to prove that the testers and Rosegold investors intended to purchase securities. The court disagreed, stating that it applied an objective inquiry. Instead, the court clarified, the evidence about the testers and Rosegold investors simply established disputed factual issues that precluded it from finding a prima facie securities violation as to those purchasers.
What constitutes an “offer” of a security
The SEC next argued that the court failed to consider that Blockvest made a general offer of securities by way of its promotional materials. Section 17(a) prohibits fraud not only in the sale, but also in the offer of a security. 15 U.S.C. § 77q. Therefore, the SEC argued—whether or not the defendant completed a sale of BLV—“the promotional materials presented on Defendants’ website, the Whitepaper posted online, and social media accounts concerning the ICO of the BLV token constitute an ‘offer’ of unregistered ‘securities,’ that contain materially false statements” in violation of Section 17(a). In opposition, the Defendants argued that the SEC failed to demonstrate an offer was made because there was no “manifestation of an intent to be bound” by any transaction for BLV tokens.
The court examined what it means to “offer” securities in this context. First, the court analyzed whether the identified promotional materials promoted a “security” (i.e. whether the BLV token meets the Howey test based on Blockvest’s public representations). With little analysis, the court concluded that the SEC demonstrated that BLV tokens meet the Howey test definition of a “security.” Next, the Court considered whether the same promotional materials amounted to an “offer” of BLV. The Securities Act defines “offer” to “include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value.” The court concluded that an offer of securities does not require a “manifestation of intent to be bound,” and “and there is no requirement that performance must be possible or that the issuer must be able to legally bind a purchaser.” Rejecting the Defendants’ argument that “offer” in the securities context should be given the same meaning that the term has in contract law, the court concluded that the “term ‘offer’ in securities law has a ‘different and far broader’ meaning.” Taken as a whole, “the contents of Defendants’ website, the Whitepaper and social media posts concerning the ICO of the BLV tokens to the public at large,” the court concluded, “constitute an ‘offer’ of ‘securities’ under the Securities Act.”
On Reconsideration, the SEC Established that Blockvest was Likely to Violate Section 17(a) in the Future
After concluding that the SEC made out a prima facie case for prior violations of Section 17(a), the court reconsidered its earlier holding that the SEC did not show a likelihood that Blockvest would violate securities laws in the future. Here, the SEC argued that the court erred in relying on promises by the Ringgold that he would not go through with the planned ICO. In light of Defendants’ attempt to file documents that violated Rule 11 (by attempting to file directly what Defendants’ attorney refused to file), and with the benefit of its new conclusion regarding prior violations of securities laws, the court ultimately granted the SEC’s request for preliminary injunction.
As with the prior order, given the early stage of this litigation, it is again important not to read too much into this decision. That said, Judge Curiel’s opinion provides helpful analysis on what exactly it means to “offer” securities in the context of crypto-tokens. In particular, this decision demonstrates that defendants can run afoul of securities laws simply by publishing a white paper and a website, without ever selling any functional tokens.
 A copy of the decision can be found here.