SEC Wins Digital Asset Decision: Court Endorses the Application of Howey to Digital Assets and ICOs and Issues Injunction Barring Distribution of Telegram’s Grams

Sullivan & Cromwell LLP - March 27, 2020
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In a decision issued this week, a federal court granted the SEC’s motion for an injunction halting the distribution of digital tokens intended to form a new mass-market digital currency.  Applying what it characterized as the “familiar test” from SEC v. W.J. Howey Co., the Court concluded that the tokens were securities, rather than commodities, and that the initial offering of them, although conducted in compliance with the requirements of Rule 506(c), was not exempt from registration requirements in light of the expectation of future resales to the public.  The Court’s decision highlights how companies must carefully consider the structure of initial coin offerings and other digital asset transactions to avoid violating registration requirements.