We have examined the registration requirement in a previous post and the anti-fraud provisions as enforced publicly by the SEC or DOJ in the last post. In this post, we will turn to private rights of action (e.g. sections 11, 12, 15 and (impliedly) 17(a) of the Securities Act 1933 and (impliedly) section 10(b) and section 18 of the Securities Exchange Act 1934) to examine whether they are available in cross-border ICO cases.
The Supreme Court's ruling in Morrison v. National Australia Bank 561 U.S. 247 (2010) controls in private actions since the amendments introduced by the Dodd-Frank Act only concern public enforcement. The Supreme Court adopted the "transactional" test according to which section 10(b) of the Securities Exchange Act 1934 was only applicable to transactions in securities listed on domestic exchanges or domestic transactions in other securities.
It is a bright-line test so far as it relates to transactions on exchanges. But clarity is lacking with respect to off-exchange transactions. The Second Circuit subsequently held that a transaction was domestic where irrevocable liability was incurred or title passed within the United States. Concerning irrevocable liability, the Court found it sufficient if "the purchaser incurred irrevocable liability within the United States to take and pay for a security, or that the seller incurred irrevocable liability within the United States to deliver a security": Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 68 (2d Cir. 2012).
How will the Morrison test be applied to the transactions of ICO tokens? Since ICO tokens are traded on a borderless network, the place where title in them passes seems incapable of being localized in any specific jurisdiction. Then, where would parties incur irrevocable liability? In SEC v. PlexCorps (No. 17 Civ. 7007), responding to the defendants' motion which relied on the Morrison test, the SEC noted that the investors were irrevocably committed to purchase the ICO tokens by sending electronic communications into the defendants' automated system for the sales of tokens. The SEC further observed that those communications were deemed to have been sent from the investors' place of business pursuant to section 15(d) of the Uniform Electronic Transactions Act. This provision reads:
§15 TIME AND PLACE OF SENDING AND RECEIPT.
(d) Unless otherwise expressly provided in the electronic record or agreed between the sender and the recipient, an electronic record is deemed to be sent from the sender’s place of business and to be received at the recipient’s place of business. For purposes of this subsection, the following rules apply:
(1) If the sender or recipient has more than one place of business, the place of business of that person is the place having the closest relationship to the underlying transaction.
(2) If the sender or the recipient does not have a place of business, the place of business is the sender’s or recipient’s residence, as the case may be.
If the SEC's reasoning is accepted, ICOs would be deemed to take place within the United States for the purpose of the Morrison test where either the investors have their residence or the ICO issuer has its place of business within the United States at the time when the electronic communications are sent by the investors and received by the ICO issuer's automated system. The result would be like coming full circle to the "conduct" test after performing a lot of conceptual gymnastics. Let us wait and see what the court has to say.