The US Securities and Exchange Commission (SEC) is in talks with Veritaseum CEO Reginald Middleton over a potential settlement of the case, alleging that their $15 million token sale was illegal.
“The parties have been engaged in settlement discussions. In order to permit the parties to devote their resources to settlement, the parties jointly request that the Court set the scheduling conference for no earlier than November 11, 2019. This is the first request for an extension of the scheduling conference,” the agency said today.
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The Veritaseum CEO had previously argued that his company’s token did not constitute a regulated security and suggested that VERIs issued during the startup’s initial coin offering (ICO) have a mere utility function. He accused the SEC of “twisting” the facts about its token, called VERI, and asked for dismissal of the complaint.
Earlier in July, the SEC’s Cyber Unit obtained an emergency asset freeze against Veritaseum and filed charges against its principal Reginald Middleton, alleging multiple violations of the Securities Exchange Act. The complaint states that the New York-based blockchain company had been selling VERI tokens, which the SEC claims are unregistered securities.
The agency added that they tried to flout regulatory requirements by characterizing the cryptocurrency (VERI) as things like gift cards and software. It also called one of Middleton’s other projects as an outright securities fraud that doesn’t differ from a typical pyramid or Ponzi scheme.
How to figure out if an ICO token is a security
Furthermore, the filing also notes that the defendants mislead investors with about the business venture and offered investors starkly different facts about the company’s revenue.
The defendants, however, disagreed and explained that the SEC has not demonstrated that investors had an expectation of profits, as required to satisfy the second prong of Howey.
Earlier this year, the SEC revealed a framework written by two employees on how to determine if a digital asset is a security. The main takeaway was that whether an asset is a security right now follows the “Howey Test,” which applies to crypto as it does to other investments
The ruling comes from a 1946 US Supreme Court case that classifies a security as an investment depending on three elements. First, the investment product can be exchanged for value. Second, the investment involves some element of risk, and third, it must be tradable.