Tag: Digital Assets

A recent decision in the United States District Court for the District of Connecticut appears to be the first of its kind in the nation. In the case Audet et al v. Garza et al, a federal jury recently weighed in on whether cryptocurrency products were considered securities.^[1] The jury held that four digital-asset products linked to cryptocurrency were not securities.^[2]

In the case, a class of customers brought an action against GAW Miners LLC (“GAW Miners”) and ZenMiner LLC (“ZenMiner”) for running a cryptocurrency Ponzi scheme.^[3] When GAW Miners and ZenMiner were faced with demands from customers for the physical cryptocurrency mining equipment which they could not meet, GAW Miners and ZenMiner turned to Hashlets, Hashpoints, Paycoin and HashStakers (collectively the “Digital Assets”). ^[4]  These Digital Assets provided customers with a portion of the computing power without owning the physical hardware.^[5] Moreover, the Digital Assets served as virtual wallets for the promissory notes and virtual currency of GAW Miners and ZenMiner.^[6] The plaintiffs argued that these Digital Assets were investment contracts and therefore were unregulated securities.^[7]

The plaintiffs asked Judge Michael Shea to rule as a matter of law that the Digital Assets were securities under the Howey test. ^[8] The Supreme Court in Howey stated an investment contract exists when “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” ^[9] However, in an unusual decision, Judge Shea declined to rule as a matter of law that the Digital Assets were securities.^[10] Instead, the judge left the issue of how to classify the Digital Assets for the jury.^[11] Despite the SEC previously referring to one of the Digital Assets, Hashlets, as a security in a case against one of the former defendants in this case,^[12] the jury ruled that the Digital Assets were not investment contracts, and therefore, they were not securities.^[13]

The issue of how to define cryptocurrencies is an ongoing debate, and the federal jury’s ruling in this case does not settle it.

^{[1] Elise Hansen, Crypto Mining-Linked Products Weren’t Securities, Jury Finds, Law360 (Nov. 2, 2021), https://www.law360.com/articles/1436790/crypto-mining-linked-products-weren-t-securities-jury-finds.}

^{[2] Id.}

^{[3] HHR Wins Groundbreaking Jury Verdict in Crypto Fraud Trial, HHR (Nov. 3, 2021), https://www.hugheshubbard.com/news/hhr-wins-groundbreaking-jury-verdict-in-crypto-fraud-trial.}

^{[4] Id.}

^{[5] Hansen, supra note 1.}

^{[6] Id.}

^{[7] Id.}

^{[8] Alison Frankel, In apparent first, Conn. class action jury finds crypto products are not securities, Reuters (Nov. 3, 2021), https://www.reuters.com/legal/transactional/apparent-first-conn-class-action-jury-finds-crypto-products-are-not-securities-2021-11-03/.}

^{[9] SEC v. W. J. Howey Co., 328 U.S. 293, 298­–99 (1946).}

^{[10] Id.}

^{[11] Id.}

^{[12] HRR, supra note 3.}

^{[13] Hansen, supra note 1.}