A logo for the fictional “Blockchain Exchange Commission” the U.S. Securites and Exchange Commission alleges Blockvest used to promote its ICO (left) and the SEC's official seal, which Blockvest is also alleged to have used without authorization. (Photo illustration: Jason Doiy/ALM)

Lawyers looking at a first-of-its-kind decision this week turning back the SEC's request for a preliminary injunction to block the launch of an initial coin offering cautioned that while the loss is undoubtedly a setback for the agency, it isn't likely to dramatically affect its approach to the ICO market.

U.S District Judge Gonzalo Curiel of the Southern District of California turned back the SEC's injunction bid Tuesday in a case against the backers of the Blockvest ICO. The judge, who previously granted the SEC's ex parte request for a temporary restraining order and froze the assets involved in the ICO, found there was a gap between the two sides' versions of the facts and that the SEC hadn't carried its burden to show Blockvest's BLV tokens were securities.

Securities attorneys contacted in the wake of the decision pointed out that at this stage of the proceedings, where there has not been full discovery, the SEC has the burden of showing there was a violation of the securities laws and a likelihood the violations would be repeated. Curiel found there were factual disputes over whether investors bought into the BLV tokens with an expectation of profit—one of the prongs of the so-called “Howey” test named for the 1946 U.S. Supreme Court case that laid out the ground rules for defining a security.

“Judge Curiel did not decide that this was not a securities offering,” said C. Neil Gray, a partner at Reed Smith in New York. ”That's an important point. This case goes on.”

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When the SEC filed the complaint in October, the agency's lawyers alleged the Blockvest ICO had garnered $2.5 million in outside investments and sought to get $100 million. In fending off the injunction bid, the ICO's backers and their lawyers contended that their blockchain had just $10,000 worth of cryptocurrency from 32 internal, sophisticate investors and that its platform was still in testing.

In the wake of the SEC lawsuit, the company's founder also agreed to cease all efforts to proceed with the ICO and promised not to go forward on any offering without giving the SEC 30 days' notice—something that convince the judge there was little risk of a securities violation going forward.

“Although the preliminary injunction was formally denied, the SEC effectively stopped the ICO,” said David Zaslowsky, a partner in the New York office of Baker McKenzie who edits the firm's blockchain blog. “If you're an experienced litigation lawyer, you realize courts can be very practical in their decision-making.” The fact that the SEC initially thought $2.5 million was at risk, but now it appears that much less is at stake ”could be part of what's driving the court.”

Zaslowsky said that what initially caught his eye in the complaint were allegations Blockvest falsely claimed it had SEC approval, and that it used the SEC seal without authorization, which is a federal offense. The complaint also claimed Blockvest touted the endorsement of a made-up agency—the “Blockchain Exchange Commission”—giving it a logo similar to the SEC seal and the same address as SEC headquarters.

“If the case does go forward on the merits, those issues are going to come back to life,” Zaslowsky said.

Will the SEC Let ICOs Be? Not Likely

Securities attorneys across the board said they expect that Tuesday's decision will do little to slow the tide of the SEC's activity in the ICO space, especially when the agency believes it's spotted fraud.

“I don't see it as making any change in the law concerning the SEC's approach to whether a token is a security,” Zaslowsky said. “The SEC has repeatedly said it's the Howey test that applies, and that's exactly the test that this court applied.”

Reed Smith's Gray adds that SEC lawyers know the Howey test, and they know it's dependent on facts and circumstances of individual cases. But, he added, it's “much more straightforward in 'run of the mill' securities fraud cases than it is in the crypto token context.”

On that front, Jordan Maglich of Wiand Guerra King in Tampa, Florida, the author of a blog about Ponzi schemes, said it's “absolutely” clear the SEC wishes the developing factual record in the Blockvest case would have mirrored the version it presented in its complaint. “But I am equally positive that—appeal or not—they are content to move forward with the discovery process and a trial.”

John Paul Schnapper-Casteras of Schnapper-Casteras in Washington, D.C., added the decision was “a reminder that critical issues in fintech will be resolved by courts interpreting specific statutes and applying precedents.”

“Some ICOs may settle relatively amicably—but the sturdiness of the SEC's own interpretation will hinge upon litigation,” Schnapper-Casteras said.