On October 5, US District Judge Gonzalo Curiel of the Southern District of California granted the Securities and Exchange Commission's (SEC) ex parte application to, among other things, halt a planned ICO by blockchain-based crypto exchange Blockvest LLC and freeze the assets of Blockvest and its founder, Reginald Buddy Ringgold, III. But on November 27, the judge denied the plaintiff's motion for a preliminary injunction, ruling that the SEC had failed to demonstrate that the BLV tokens sold by Blockvest and Ringold in pre-ICO sales failed to meet the definition of a "security" under US law.
In October, ETHNews reported on the emergency court order obtained by the SEC, which halted Blockvest's planned ICO. The SEC's complaint filed in connection with its application for that order alleged the ICO's backers falsely claimed the ICO had been approved by the SEC. The complaint also alleged Ringgold "promoted the ICO with a fake agency he created called the 'Blockchain Exchange Commission,' using a graphic similar to the SEC's seal and the same address as SEC headquarters." (The Blockchain Exchange Commission does technically exist, at least as a website, though it is not affiliated with the SEC or any governmental regulatory agency.)
According to Tuesday's ruling, during the hearing on the SEC's motion for a preliminary injunction, Ringgold asserted that BLV tokens, which a few investors had purchased during the pre-sale, "were only designed for testing the platform and the testers would not and could not keep or remove BLV tokens from the Blockvest Exchange." Furthermore, Ringgold stated that the 32 investors in the Blockvest exchange had put in a total of less than $10,000 of bitcoin and Ether, and that the investors were friends and family members of Ringgold and Blockvest's chief financial officer Michael Sheppard, who had, at times, loaned them money "personally," which they themselves invested. The order states, "Most of the individuals confirm they did not buy BLV tokens or rely on any of the representations the SEC has alleged were false."
The SEC also alleged Blockvest claimed to have raised $2.5 million from investors, though Ringgold clarified that the $2.5 million had not been from the public, but instead was based on a transaction with investor David Drake. The transaction, however, "eventually collapsed and they admit the social media posts were overly optimistic."
(Note: Drake is chair of LDJ Capital, one of the five groups listed as founding members of the Blockchain Exchange Commission, along with Master Investment Group, the Soho Loft Media Group, Blockchain Investment Group, and Rosegold Investments – the last of which lists Ringgold as founder.)
Ultimately, Judge Curiel denied the preliminary injunction. He found the SEC had failed to sufficiently allege its claims for securities law violations because it was unable to demonstrate that the BLV tokens met the requirements of the Howey Test, which courts use to determine whether transactions involve securities. Howey's 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." Judge Curiel stated that, based on the available facts, he could not determine whether there had been an investment of money or an expectation of profits. As such, the SEC did not demonstrate that the BLV tokens purchased by the investors helping to test the platform were "securities" under US securities laws.
For his part, Ringgold recognized that mistakes were made during the testing process but said that no "omissions were made in connection with the sale." Currently, he has stopped his efforts to proceed with the ICO and agreed not to proceed until he gives the SEC's counsel 30 days' notice.