Legal Precedent: US Judge Determines that Security Laws Apply to Initial Coin Offerings (ICOs)

Judge Raymond Dearie

One way or another, something had had to happen in the wild arena of initial coin offerings (ICOs) – and now, at least from a legal point of view, it just might have. In a precedential and likely consequential ruling, a U.S. federal judge may have directed and shaped how initial coin offerings would be viewed in the eye of the law in the future, and under which laws ICOs would be legally covered.

Raymond Dearie, U.S. District Judge in New York, ruled (PDF) that prosecutors on behalf of the state can carry on with a lawsuit against an individual called Maksim Zaslavskiy who had been charged with one count of conspiracy and two counts of securities fraud as part of a number alleged ICO frauds. The prosecution claims that Zaslavskiy had promoted several ICO frauds which he had falsely portrayed as being backed by a variety of real assets such as real estate and diamonds, whereas in reality these assets did not actually exist.

Zaslavskiy’s attorneys had attempted to contest the suit by alleging that securities law shouldn’t be applied to ICOs, but Judge Dearie denied their motion to dismiss based on this pretext.

What does this ruling mean exactly? According to Professor Peter Henning from Wayne State University’s law school in Detroit:

This ruling affirms the SEC’s position that it has authority over ICOs and that market manipulation and anti-fraud provisions in the law apply […] The defense here was arguing that it’s not a security, but the judge has rejected that claim, saying that this case can fit under the securities laws, and that’s an important first step.

In essence, the ruling shifts the balance in what was until now an uncharted enforcing territory to the side of the Securities and Exchange Commission (SEC), and thus elucidating that ICO-related investigations and ensuing prosecutions do fall under the agency’s authority. Please note that this is still not the final word on the matter before it will be finalized – there’s yet the process of appeal and then, if indeed Judge Dearie’s ruling will hold, only a jury will ultimately decide whether or not ICOs should be regarded as a security or utility.

There’s still some road ahead of us until the final decision concerning under which laws ICOs fall under, but with Judge Dearie’s recent ruling, we’re getting closer and closer to getting out of the grey area.