US Federal Judge: fraudulent ICOs are subject to securities laws

The US federal judge ruled that the criminal case against two allegedly fraudulent primary tokens (ICO) placements is subject to securities laws.

District Judge Raymond Dearie on Tuesday ruled that the case against two allegedly fraudulent ICOs, which were carried out by a Brooklyn resident Maxim Zaslavsky, would be considered further, and the defendant's petition to dismiss the lawsuit was dismissed.

As previously reported, Zaslavsky is accused of committing fraud with securities through the sale of tokens, which represent shares of a real estate company and the diamond business. At the same time, prosecutors argue that none of the companies behind the token sales actually bought the assets that customers invested in.

In their statement Zaslavsky's attorneys argued that "in this case, securities laws are unconstitutionally vague," to which Diri stated:

"Stripped of the 21st-century jargon, including the defendant's own characterization of the offered investment opportunities, the challenged indictment charges a straightforward scam, replete with the common characteristics of many financial frauds."

As such, securities laws as they pertain to the indictment and charges against Zaslavsky are not vague, Dearie ruled.

Notably, Dearie did not say whether ICOs are specifically securities, instead saying that this "can only fairly be a question of proof at trial, based on all of the evidence presented to a jury."

He added, "Zaslavsky's primary contention – that the investment scheme at issue did not constitute a security, as that term is defined under Howey, is undoubtedly a factual one."

Howey test

Dearie explained that in the case of Zaslavsky, the Howie test - the US standard - can be used to determine whether something is a security. An independent analysis of the Howie test will be required to finalize the court decision.

The judge repeated the previous decision he made in this case, ruling that the jury decide whether the sale of Zaslavsky's tokens qualifies as a securities offering.

"The question is whether the 'elements of a profit-seeking business venture' are sufficiently alleged in the indictment, such that, if proven at trial, a reasonable jury could conclude that 'investors provide[d] the capital and share[d] in the earnings and profits; [and] the promoters manage[d], control[ed] and operate[d] the enterprise.'"

Although the defendant's lawyers argued that the SEC could not regulate the sale of tokens as a security offer, prosecutors said the issue was controversial because no tokens had been created at all. 

SOURCE