The federal district court of Connecticut refused to qualify digital assets as securities

A jury in federal district court for the district of Connecticut (USA) refused to qualify digital assets that give investors the right to a part of the cryptocurrency obtained through mining as securities. This conclusion is different from the position of the Securities and Exchange Commission (SEC).

According to the facts of the class action case (Audet v. Fraser), investors who purchased the tokens were entitled to receive part of the cryptocurrency obtained by the company through mining. Using a personal account, investors could choose a mining pool, in which the company performed mining with the company's equipment. 

The court analyzed whether such tokens are securities and whether additional regulatory requirements apply to them, for example, registration of the securities issuance, offer only to qualified investors. 

For these purposes, the jury applied the “Howey Test”, which is used by the SEC itself to recognize the financial instrument as a security. 

The “Howey Test” includes four criteria: 

1. Investors contribute money. 
2. Investors expect to make a profit. 
3. The money is invested in a common enterprise. 
4. Making a profit depends not on investors, but on the third parties. 

The court concluded that the analyzed digital assets (Hashlets, Hashstakers, Hashpoints and Paycoin) are not securities. In particular, making a profit partly depended on investors, since they, e.g., made the choice of mining pools. 

This conclusion of the court does not match with the position of the SEC: in 2015 the SEC filed a complaint according to which these digital assets were treated as securities. 

Thus, the SEC qualification may not be the only correct one. Companies that issue digital assets can use available remedies to determine the status of tokens. The qualification of tokens can be the subject of consideration in court, including a jury trial.