Will 2020 be the year that censured ICOs sue their advising law firms? If the action against Faegre Baker Daniels is any indication, the answer is “yes.” But do these cases have merit?
ICO Suing Advising Law Firm
Digital Capital Management, which developed a cryptocurrency investing fund called Crypto Asset Management, is suing international law firm Faegre Baker Daniels for allegedly administering “questionable advice.”
According to the complaint, Faegre Baker Daniels supposedly steered the fund away from registering with the Securities and Exchange Commission — as stipulated under the Investment Adviser Act of 1940 — because its structure didn’t constitute a security.
The SEC disagreed, and in 2018 slapped the fund with an enforcement action and $200,000 fine for failing to register despite qualifying as an “investment company.” Now, the finance firm is pointing a finger at its law firm for counseling that cryptocurrency assets weren’t securities.
Are Cryptocurrencies Securities?
The suit’s gravamen is whether or not Digital Capital Management’s product qualifies as a security. Unfortunately, the answer isn’t crystal clear. Some crypto ventures do fall under the securities umbrella; others don’t.
Judges use “the Howey Test” to make the determination.
What is the Howey Test?
Developed for a Supreme Court case (SEC v. W.J. Howey Co.) involving a 1940s orange grove opportunity, the Howey test examines four elements of a financial product to determine whether or not its a security.
The Howey Test defines an investment contract as one where a party:
- Invests money,
- In a common enterprise,
- With the expectation of profiting,
- Based on the efforts of a third party.
Will these Lawsuits Against ICO Law Firms Succeed?
Every lawsuit is different, and it’s impossible to predict what will happen in the course of a case. But it’s also fair to predict that many lawsuits against ICO consulting firms will likely be tossed early. That or awarded damages will be minimal.
Because ICO law is still in its infancy, the SEC is still wading through crypto legal anomalies. Last summer, the most definitive answer the agency could muster regarding the security status of ICOs was: some cryptocurrencies are securities, and some are not. And while the agency did offer some rough guidelines, it was anybody’s guess as to where the hammer landed with each case.
Then, towards the end of 2019, the agency declared that Bitcoin was not a security. The NYDFS’ acceptance of Stellar Lumens for trading on the itBit exchange also indicated that finance officials weren’t lumping certain cryptocurrencies and related ICOs into the securities category.
Consult with an ICO Lawyer
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