In what appears to be the first federal decision finding that the U.S. Securities and Exchange Commission hasn't shown a digital asset offered in an initial coin offering is a security, a judge in San Diego has turned back a request from the SEC for a preliminary injunction against the backers of the Blockvest ICO.

U.S District Judge Gonzalo Curiel of the Southern District of California, who previously granted the SEC's ex parte request for a temporary restraining order and froze the assets involved in the ICO, found Tuesday that the SEC couldn't show that investors bought into the Blockvest offering with the expectation of making a profit from the efforts as others—part of the three-part “Howey” test for the definition of a security under the the 1946 U.S. Supreme Court decision in SEC v. W.J. Howey Co.

SEC representatives didn't immediately respond to a request for comment on the decision. But former SEC lawyers now in private practice said that the case sends a message to the agency that courts are paying close attention to the question of whether digital tokens fit the legal definition of a security—even in cases where there are allegations that ICO investors are being defrauded.

“It is only through these sorts of decisions that we will learn the limits of the SEC's jurisdiction,” said Paul Hastings' Nick Morgan, who was previously senior trial counsel at the SEC. “The SEC should not assume that the courts are going to skate over whether or not there is a security present.”

In its complaint, the SEC alleged that Blockvest and its founder, Reginald Buddy Ringgold III falsely claimed its ICO was “licensed and regulated” by various agencies, including the SEC. The agency also claimed Ringgold promoted the ICO on the internet by saying it had gotten sign off from a fake agency called the “Blockchain Exchange Commission.” The SEC alleged Ringgold used a logo similar to the SEC seal and the same address as SEC headquarters for the faux agency.

But in defending against the SEC preliminary injunction request, Blockvest contended its initial offering involved just 32 testers who put a total of less than $10,000 worth of Bitcoin and Ethereum onto the Blockvest Exchange. Its BLV tokens, they claim, were only designed for testing the companies platform. Although the SEC had shown that some of the venture's backers had written “Blockvest” or “coins” on their checks to the company, Curiel found that the SEC couldn't show that the test investors expected to profit.

“Merely writing “Blockvest” or “coins” on their checks is not sufficient to demonstrate what promotional materials or economic inducements these purchasers were presented with prior to their investments,” Curiel wrote.

Stanley Morris of Santa Monica's Corrigan & Morris, who represents Blockvest and Ringgold, said it was obvious that the judge had studied the facts and the applicable precedent.

“It is an extraordinary challenge for defendants facing freeze orders and restraining orders obtained ex parte by the government,” Morris said. “They face a mountain of expedited discovery ordered by the court, with no money to pay professionals to respond.” Morris said his client's “met that challenge through aggressive defense and proactive presentations of evidence.”

“Relieved of the constraints of the TRO, our clients are now free to defend themselves through trial and look forward to being vindicated,” he said.

Fenwick & West's Mike Dicke, who was previously the top enforcement lawyer in the SEC's San Francisco regional office, said that the case demonstrated that question of whether or not an individual ICO is a security or not will depend on how its “offered and sold.”

“Is this digital asset a security? That's not the right question to ask,” he said. “I think that my biggest takeaway from the order is that the SEC failed to prove that the way it was 'offered and sold' meets the definition of a security.”

Read the decision below:

Clarification: An earlier version of this story was headlined “Judge to SEC: This ICO Isn't a Security Offering.” The headline and first sentence have been updated to reflect the fact that the judge found the SEC could not conclusively show that the underlying token was a “security” because of disputed factual issues.