Welcome to the securities family: Court sides with SEC in mining device case

A U.S. court has ruled that crypto mining boxes sold by Green United are securities, satisfying the SEC claims.

According to Bloomberg Law, Green United did not convince a federal court to dismiss a civil fraud lawsuit from the Securities and Exchange Commission, which accused the firm of misleading investors.

The lawsuit says the company’s mining equipment, known as “Green Boxes,” was part of a securities transaction.

What is the essence of the fraud?

In March 2023, the Utah-based mining company Green United was suspected of fraud. The Commission later charged the company with violating the Securities Act and selling fake assets worth $18 million.

All the details of the case were included in the SEC filing. It featured two people — the company’s founder, Wright Thurston, and the leading promoter, Kristoffer Krohn.

Thurston and Krohn positioned their business as green mining. They offered their clients the opportunity to invest in equipment and promised a monthly income of up to 50%. The minimum investment was $3,000.

The agency concluded that Green United had never been involved in green mining. They directed all client funds to mining Bitcoin (BTC) and took the profits for themselves.

“Unlike ERC-20 tokens (such as GREEN), certain crypto assets like Bitcoin use the process of mining to generate new tokens. With such crypto assets, a new token is mined as a reward for the miners who complete algorithms with cryptographic hash functions that verify new transactions on the Blockchain.”

The SEC believes that Green United defrauded its investors. The devices were sold with hosting agreements, under which the company would manage Green Boxes for investors, promising them huge profits. The U.S. District Court for the District of Utah, headed by Judge Ann Marie McIff Allen, agreed with the SEC.

According to the SEC, Green United did not mine tokens with its hardware despite its promises to investors. As a result, the company raised $18 million from people hoping to profit from crypto mining. Instead of fulfilling those promises, it purchased unmined tokens and deposited them into investors’ accounts.

This was allegedly done to simulate a successful mining operation. According to the SEC, GREEN’s mined currency had no actual value.

Green United claims no investors lost money

Responding to the SEC’s claims, Green United stated that no investors lost money and that the regulator’s allegations were baseless. The company argued that the SEC was trying to rewrite the law by classifying hosted mining as a security, which they say is common practice even among public firms.

In May, the company’s executives motioned to dismiss the SEC’s lawsuit. Thurston and Krohn claimed that Congress has considered and rejected the Commission’s authority to regulate the crypto sector. At the same time, the SEC had allegedly been “vague and inconsistent” in enforcing its measures against the industry through enforcement.

“It is fundamentally unfair and unconstitutional for a regulatory agency to leave an industry to guess at the meaning of the law from its hodgepodge of disjointed statements, inconsistent application, vague testimony, and unhelpful guidance.”

Court filing

Another argument made by Thurston and Krohn is the SEC’s unclear position on the Green Boxes. The regulator allegedly had not confirmed that the “boxes” are an investment contract or product.

However, the judge said the defendants failed to prove their innocence and refute the agency’s statements.

What else does the SEC consider securities?

In addition to mining hardware, the SEC equated the sale of NFTs to transactions in unregistered securities in August. This came to light during the indictment of the Impact Theory media company for selling non-fungible tokens (NFTs) as unregistered securities.

In addition, the SEC notified OpenSea that NFTs on the platform may be considered unregistered securities. The regulator also ruled against Flyfish Club, LLC, for conducting an unregistered offering of cryptocurrency securities by selling non-fungible tokens.

However, attacks on NFTs are much less common than on tokens. Regulator kept on claiming that all cryptocurrencies except Bitcoin should be considered as securities.

SEC clarifies the definition of securities for cryptocurrencies

In calling cryptocurrencies securities, the SEC is guided by the Howey test, a somewhat outdated legal framework developed back in 1946. Named after the SEC’s landmark lawsuit against W.J. Howey, this test determines whether an asset qualifies as a security. This is based on factors such as initial sales and fundraising campaigns, ongoing promises of project development, and the use of social media to promote the features and benefits of its protocols.

However, earlier in September, the SEC, in an amended complaint against Binance, stated that it never considered specific tokens as securities but took into account the full set of contracts, expectations, and agreements to sell the assets.

The statement completely contradicted the words of SEC Chairman Gary Gensler, who claimed that tokens are securities because there is a group of developers, and the public expects profits from the activities of this group. Thus, he argued that crypto investors hope to profit from the efforts of the project creators — just like shareholders of public companies.

This approach explains the SEC’s attacks on Green United — the company offered to invest in Boxes, promising profits in return.