On November 1, 2021, a jury decided that certain crypto mining-linked products were not securities. The case is Audet et al. v. Garza et al., 3:16-cv-00940, pending in the United States District Court for the District of Connecticut. 

This is a very important development for many reasons. First, this is the first case we know of where a jury had to decide whether certain cryptocurrency products were securities. Second, the jury’s verdict that the products were not securities contradicted the Securities and Exchange Commission’s (“SEC”) position in a previous case that “hashlets,” one of the products in question, were securities: SEC v. Garza et al., District Court for the District of Connecticut, 3:15-cv-01760 at 19-21 (“Hashlets constitute investment contracts, and thus “securities” under Section 3(a)(10) [15 U.S.C. §78c(a)(10)] of the Exchange Act.”)

The jury in Audet considered whether four different products were securities:

  • Hashlets: In August 2014, GAW Miners and ZenMiner decided to sell Hashlets. A hashlet “entitled an investor to a share of the profits that GAW Miners and/or ZenMiner would purportedly earn by mining virtual currencies that were maintained in their data centers.”
  • Paycoin: In November 2014, GAW Miners announced its plans to launch a new form of virtual currency called “Paycoin.”
  • Hashpoints: In advance of the launch of Paycoin, GAW Miners offered customers Hashpoints, which “were convertible promissory notes that could be purchased or mined and exchanged for Paycoin once Paycoin launched.”
  • HashStakers: HashStakers were digital wallets designed to hold Paycoin.

The presiding judge told the jury to decide whether each of these products was an “investment contract” and was therefore a security. Using the three-factor test from SEC vs. Howey, the jury evaluated whether each product was:

(1) an investment of money;

(2) in a common enterprise;

(3) with profits to be derived solely from the efforts of others.

Despite the SEC’s previous characterization of hashlets as securities, the jury found that customers actively controlled their hashlets, meaning they could not be considered a passive investment (“with profits to be derived solely from the efforts of others”). Therefore, the jury decided that hashlets did not meet the Howey test and were not securities.  The jury also determined that the other three products were not securities.

This marks the first time a court (and indeed, a jury of citizens) disagreed with the SEC on whether a cryptocurrency product was a security.  But it certainly may not be the last.