The U.S. Securities and Exchange Commission (SEC) has just secured another victory in its ongoing crackdown on unregistered securities, this time against the defunct blockchain company Rivetz and its CEO, Steven Sprague. In a recent ruling, a Massachusetts federal court judge sided with the SEC, concluding that Rivetz’s 2017 initial coin offering (ICO) of its Ethereum-based Rivetz (RvT) token violated U.S. securities laws.
The $18 Million ICO That Sparked Legal Trouble
Back in 2017, Rivetz, a company focused on blockchain-powered mobile security solutions, raised $18 million in its ICO, selling RvT tokens to over 7,200 investors—roughly one-third of whom were U.S. residents. The SEC stepped in after alleging that Rivetz and Sprague sold these tokens as unregistered securities, violating federal law. The case has been ongoing since 2021, with the SEC maintaining that the RvT token met the criteria of a security under the Howey Test, a legal framework used to determine whether an asset is a security.
In its September 30 ruling, Judge Mark Mastroianni of the Massachusetts District Court agreed with the SEC’s position, affirming that the Rivetz tokens were indeed securities. This judgment adds to the SEC’s growing list of ICO-related victories, as the agency continues to target crypto projects that fail to comply with U.S. securities regulations.
What Happened in Court?
While Rivetz and CEO Steven Sprague did not dispute the key facts of the case, Sprague, who represented himself in court, argued that the RvT token was a software product rather than an investment contract, as the SEC claimed. Essentially, Sprague believed the token was a utility, not a security. He pointed out that the token was designed to be used within a larger ecosystem Rivetz was developing—essentially a security system for mobile devices.
However, Judge Mastroianni disagreed with Sprague’s argument. In his ruling, the judge highlighted that throughout the ICO, Rivetz and Sprague made statements that directly tied the value of the RvT token to Rivetz’s ability to create this “security ecosystem” for mobile devices. Essentially, the token’s value was expected to rise based on Rivetz’s future success, which met several criteria of the Howey Test.
The Howey Test: Why It Matters
The Howey Test is a legal standard used to determine whether an asset is a security. To pass the test, an asset must involve:
- An investment of money
- In a common enterprise
- With an expectation of profits
- From the efforts of others
In Rivetz’s case, the court ruled that the RvT token clearly met these criteria. The judge pointed out that the token’s value was “directly dependent on Rivetz’s entrepreneurial efforts,” especially since the company had not yet developed a fully functional mobile security ecosystem. In other words, buyers of RvT tokens were investing with the expectation that Rivetz would succeed in building its technology, and in turn, the tokens’ value would increase.
Additionally, Judge Mastroianni noted that the tokens were presented as a key component of Rivetz’s security ecosystem, with their future value tied to the success and demand of that ecosystem. Without a fully functioning platform, these tokens had no inherent value, making them speculative investments.
What’s Next for Rivetz and Sprague?
Following the court’s ruling, the SEC was instructed to confer with Sprague and file a proposal for both injunctive and monetary relief by October 22. In practical terms, this could mean financial penalties, possible refunds to investors, and a court order to prevent Rivetz or Sprague from future violations of securities laws.
At the time of writing, Sprague has not yet responded to requests for comment. However, this case serves as another strong signal from the SEC to the broader crypto industry that failure to comply with securities laws will lead to serious consequences.
A Trend of SEC Wins in ICO Cases
This latest win for the SEC follows its partial victory in another high-profile ICO case just days earlier. On September 24, a New York federal court ruled that Opporty International and its founder, Sergii Grybniak, had sold unregistered securities through their $600,000 ICO in 2017 and 2018. The SEC’s success in these cases suggests that its aggressive stance on ICOs isn’t slowing down anytime soon.
Why This Matters to the Crypto Industry
For crypto projects and investors alike, this ruling underscores the importance of understanding the legal landscape surrounding token offerings. The SEC’s focus on ICOs and its interpretation of tokens as securities highlights a growing push to bring more regulatory clarity and accountability to the market.
If you’re a crypto startup, launching an ICO without first registering with the SEC (or without securing a valid exemption) could land you in hot water. Even if your project is based on a promising use case, like Rivetz’s mobile security concept, you still need to ensure compliance with existing securities laws to avoid costly legal battles.
On the flip side, this ruling is another reminder for investors to stay cautious when participating in ICOs. Without proper oversight, tokens can easily end up being speculative investments that don’t deliver on their promises.
Conclusion
The SEC’s victory against Rivetz in this $18 million ICO case is another reminder of the regulatory challenges facing the crypto industry, especially when it comes to token offerings. Rivetz and CEO Steven Sprague now face potential financial penalties and restrictions, as the SEC continues to clamp down on unregistered securities in the blockchain space.
As the legal landscape for cryptocurrency evolves, both crypto companies and investors will need to stay on top of ever-changing regulations to avoid landing in the SEC’s crosshairs. For now, it’s clear that the SEC isn’t backing down, and its efforts to regulate the crypto space are only gaining momentum.
