While the Securities and Exchange Commission has taken a more active role in policing initial coin offerings over the last year, many in the ICO space have hoped courts would limit the reach of the federal securities laws.
However, courts have repeatedly dashed such hopes. On Jan. 24, a federal appellate court poured further cold water over the idea that someone in the U.S. selling securities to investors outside the U.S. might evade the SEC’s reach.
The case, SEC v. Traffic Monsoon, did not involve an ICO, but it did involve an issue near and dear to the hearts of ICO issuers: When a non-exchange listed security is offered and sold over the internet, does the sale take place in the location of the seller or the location of the buyer?
And, perhaps more importantly, if most of the buyers of a security are located outside the U.S., do federal securities laws apply?
The SEC sued Monsoon in 2016, alleging fraud in connection with the Utah company’s business, described as “a combination of an Internet traffic exchange, where users browse each others’ websites, and a pay-per-click program, where users are paid to click on others’ website banner ads.”
Monsoon argued that because 90% of investments were made to by individuals outside of the U.S. and the investments occurred over the internet, the federal securities laws did not apply and the SEC could not pursue the case.
In 2017, the federal trial court in Utah decided in the SEC’s favor and against Monsoon, but Monsoon immediately appealed that decision.
Astute observers immediately recognized how the Monsoon case and the trial court’s decision could be applied to ICOs — and critics identified weaknesses and shortcomings in the court’s legal reasoning.