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Standing Out in Cryptocurrency Cases | Dorsey & Whitney Law Firm

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One of the major complaints about the SEC by cryptocurrency enthusiasts is that the line is not clear on what cryptocurrencies are securities and what are not. For example, many people are perplexed when they see coins. When is it a security and when is it not a security? This “now is, now isn’t” approach can be confusing.

There is no ambiguity about the rules for making decisions. These lines were drawn by the Supreme Court decades ago. SEC vs WH Howey, 328 US 293 (1946). So the court focused on the economic realities of the transaction rather than physical objects such as coins or pieces of paper. Seen through this lens, the problem is straightforward: an investor’s money is invested in other people’s money with the hope and expectation that the value of the pool will increase due to the efforts of others, not because the investor has done something. Investors’ funds? If this happens, the investment is a security and not the coin itself, which is actually a commodity.


A recent incident involving celebrity Kim Kardashian is a good example. MeAbout Kimberly Kardashian Adm. Proc. File No. 3-21197 (October 3, 2022). Kardashian was hired to promote a crypto token called EMAX. She was paid $225,000 to promote the token. The token, called “Crypto Security” in the order, was promoted on her social media and marketing materials from May 2021. Kardashian also posted about the coin on her Instagram account, including a video introducing her.

In advertising materials, the company that issued the coin assured buyers that the coin would be traded on the secondary market. The marketing materials also explained the management of the company.

Prior to promoting EMAX, the commission issued the DAO research report on 25 July 2017, according to the order.This report focuses on the economic reality test Hi. The commission’s order also discussed what has come to be known as the “ecosystem” surrounding crypto coins. Howie A test that produces the expected return on the pooled investor money.

There is no question that Mr. Kardashian promoted the coin as promised. Nor is the fact that she was a paid promoter of the coin nor did she disclose the amount she paid for her services. violates Section 17(b) of the Securities Act, which prohibits

Kardashian settled the proceedings by cooperating with the commission and agreeing not to receive any form of compensation for three years to promote cryptocurrency security. She also pledged to cooperate with her agency.The proceedings were resolved by entering a consent-based order, a cease and desist order centered on the section cited in the order. In addition, Ms. Kardashian will pay her $250,000 wrongful reimbursement, $10,415.35 pre-judgment interest, and her $1 million penalty.


The Commission’s order is straightforward. Explain the basic principles used to analyze whether a crypto investment is a security. I am citing the leading authorities on the subject. And while noting Ms. Kardashian’s past and present collaborations, a consent decree is required for pitches and disgorgements, pre-judgment interest, and payment of fines.

Perhaps the most interesting point is not what has not been discussed.Specifically, the key to applying Howie This is the so-called ecosystem. The term has generally been used to define the idea of ​​expecting profit from the efforts of others. For example, if you invest in a company that manufactures widgets, your cash will be pooled with the money earned from other investors and put into the company’s “ecosystem” – the company’s factory and its manufacturing process. . –And the widgets for sale will appear.

However, in Ms. Kardashian’s case, order doesn’t really analyze ecosystems. Make sure there are statements, inferences, and suggestions in the commission’s order, such as those relating to possible trading of the coin. The difficulties of analysis are: The same is true for any collectible. For example, if a baseball card is traded and promoted using an investor’s money, the value of the card increases. No one calls a baseball card a security. They are valuable collectibles as long as others say they are worth it.

After all, the commission may be right in its analysis of the situation presented by Ms. Kardashian’s case. But instead of trying to clarify the lines and rules they wanted to advocate, the agency left it unclear. The large amount of publicity generated by the