In a criminal case in Brooklyn, New York, a federal court has been asked to decide for the first time whether tokens or coins issued through an initial coin offering constitute “securities” under U.S. securities laws.

On September 29, 2017 the SEC filed a civil complaint against Maksim Zaslavskiy, alleging that he had committed securities fraud and sold “illegal unregistered securities.”  The instruments at issue were tokens that Zaslavskiy allegedly sold to the public through initial coin offerings of his companies RECoin Group Foundation LLC and DRC World, Inc.  The lawsuit followed an investigation that apparently took less than 90 days to conduct, and that involved reviewing social media and online postings.  The investigation appears to have been conducted parallel with a criminal investigation by the FBI, and a criminal complaint was filed 28 days after the SEC complaint.  The SEC case was stayed pending resolution of the criminal case.

On January 29, 2018 Mr. Zaslavskiy’s criminal lawyers told the judge that they would file a motion to dismiss the criminal case based on the argument that the tokens at issue are not securities.  Shortly afterward the SEC sent a letter to the judge requesting leave to file a brief in support of the criminal prosecutors.  The judge granted the SEC’s request.

On February 27, Mr. Zaslavskiy filed a motion to dismiss the criminal case, asserting that: (1) the tokens were cryptocurrencies that are exempt from U.S. securities laws just as fiat currency is exempt; (2) the tokens did not satisfy the U.S. Supreme Court’s test articulated in SEC v. W.J. Howey Co. for determining whether an instrument is an “investment contract,” and therefore a security under U.S. securities laws; and (3) the securities fraud charges, as applied to cryptocurrencies, are void for unconstitutional vagueness. The government’s responses are due by March 19.

This case is one to watch.