Court sides with SEC in mining device case

A US court met the SEC’s arguments, ruling that the crypto mining boxes sold by Green United were securities.

Green United failed to persuade a federal court to dismiss a civil fraud lawsuit filed by the Securities and Exchange Commission, which accused the company of misleading investors, according to Bloomberg Law.

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

What is the essence of fraud?

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

The SEC filing included all the details of the case. It consisted of two people: Wright Thurston, the company’s founder, and Kristoffer Krohn, a leading supporter.

Thurston and Krohn positioned their business as green mining. They offered their customers the opportunity to invest in equipment and promised 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 diverted all client funds to Bitcoin (BTC) mining and kept the profits for themselves.

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

The SEC believes Green United defrauded its investors. The devices were sold through hosting deals where the company would manage Green Boxes for investors and promise them huge profits. The U.S. District Court for the District of Utah, presided over by Judge Ann Marie McIff Allen, agreed with the SEC.

According to the SEC, Green United did not issue tokens on 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 these promises, he purchased unmined tokens and deposited them into investors’ accounts.

This was allegedly done to simulate a successful mining operation. According to the SEC, the currency GREEN issued had no real value.

Green United claims no investors lost money

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

In May, the company’s executives requested that the SEC dismiss its case. Thurston and Krohn claimed that Congress considered and rejected the Commission’s authority to regulate the crypto industry. It also alleged that the SEC was “vague and inconsistent” in enforcing its actions against the industry through enforcement.

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

court application

Another argument made by Thurston and Krohn is the SEC’s ambiguous stance on Green Boxes. The regulator allegedly failed to verify that the “boxes” were an investment contract or product.

However, the judge said that the defendants could not prove their innocence and deny the agency’s statements.

What else does the SEC consider to be securities?

In addition to mining hardware, the SEC equated NFT sales to unregistered securities transactions in August. This comes amid allegations that media company Impact Theory was selling non-fungible tokens (NFTs) as unregistered securities.

Additionally, 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 cryptocurrency securities offering by selling non-fungible tokens.

However, attacks against NFTs are much less common than against tokens. The regulator went on to claim that all cryptocurrencies other than Bitcoin should be treated as securities.

SEC clarifies definition of securities for cryptocurrencies

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

However, in early September, the SEC stated in an amended complaint against Binance that it never considered specific tokens as securities, but did consider all contracts, expectations and agreements regarding the sale of assets.

The statement completely contradicted the words of SEC Chairman Gary Gensler, who claimed that the tokens were securities because there was a group of developers and the public expected to profit from the activities of this group. He therefore argued that crypto investors hope to profit from the efforts of project creators, just like shareholders of publicly traded companies.

This approach explains the SEC’s attacks on Green United; The company offered to invest in Boxes and promised profits in return.