On November 7, the US District Court for the District of New Hampshire ruled that digital tokens sold by a blockchain network qualify as securities under the Securities Act of 1933. The SEC sued the company in 2021, claiming that by issuing the tokens, the company conducted an unregistered offering of securities. The company countered that the tokens are not securities because they are not offered as an investment opportunity on the platform, but are designed to be used by content creators and users. The company also argued that the tokens are not securities because they serve as “an essential component” of the company’s blockchain and that investors bought them for use on the company’s network, rather than with the intention of holding them as an investment. Furthermore, the company claimed that it did not receive fair notice that its token offering is subject to securities laws.
To determine whether the tokens are securities, the court relied on the United States Supreme Court’s definition of an investment contract in SEC v. WJ Howey Co .focusing on the question of “about the economic realities surrounding [the company’s] offer of [the tokens] led investors to have a ‘reasonable expectation that profits will be derived from the entrepreneurial or managerial efforts of others.'” According to the court, several statements by the company to potential investors led them to reasonably expect the tokens to grow in value as the company continued to monitor the development of its network. “[P]potential investors will understand that [the company] presented a speculative value proposition for its digital token,” the court said, rejecting the company’s argument that it had informed some potential investors that the company was not offering the token as an investment. “[A] disclaimer cannot negate the objective economic realities of a transaction,” the court stated, adding that “[n]some case law suggests that a token with both consumptive and speculative use cannot be sold as an investment contract.” In addition, the court explained that while this may be the first instance in which securities laws are “used against an issuer of digital tokens that did not conduct an ICO, [the company] is unable to claim that it did not receive fair notice that its conduct was unlawful.”
