A recent ruling by a U.S. court has classified crypto mining machines sold by Green United as securities, supporting claims made by the Securities and Exchange Commission (SEC).
Reports indicate that Green United failed to persuade a federal court to dismiss a civil fraud lawsuit initiated by the SEC, which accused the firm of misleading its investors.
The lawsuit asserts that the company’s mining equipment, referred to as “Green Boxes,” constituted a securities transaction.
Unraveling the Allegations
In March 2023, Utah-based Green United came under scrutiny for potential fraud. Following this, the SEC charged the company with violating the Securities Act by misrepresenting its assets, estimated at $18 million.
Key individuals named in the SEC filing included the company’s founder, Wright Thurston, and leading promoter, Kristoffer Krohn.
Thurston and Krohn marketed their venture as “green” mining, enticing clients to invest in their equipment with promises of monthly returns as high as 50%. The minimum investment was set at $3,000.
The SEC determined that Green United was never engaged in genuine green mining practices, instead diverting client investments into Bitcoin mining activities, reaping profits for themselves.
“Unlike ERC-20 tokens, certain crypto assets like Bitcoin rely on mining to generate new tokens, rewarding miners who verify transactions on the Blockchain with newly mined tokens.”
The SEC contends Green United misled its investors, as the devices were sold with hosting agreements where the company purported to manage Green Boxes for investors while guaranteeing significant profits. The U.S. District Court for the District of Utah ruled in favor of the SEC, affirming the accusations.
It was found that Green United did not engage in token mining as promised to investors. Instead, the company raised $18 million from clients seeking to profit from crypto mining, but instead of mining, it purchased unmined tokens to deposit into investors’ accounts, creating a façade of a successful operation. The SEC argued that the currency mined by GREEN had no real value.
Claims of Investor Integrity
In its defense, Green United asserted that no investors suffered losses and characterized the SEC’s allegations as unfounded. The company argued that the SEC was improperly reinterpreting the law by classifying hosted mining as a security, a practice they claim is prevalent among publicly traded companies.
In May, Green United’s management sought to dismiss the SEC’s lawsuit, claiming Congress had addressed and dismissed the SEC’s authority to regulate the cryptocurrency space. They also alleged that the SEC had been inconsistent in its enforcement actions.
“It is fundamentally unfair and unconstitutional for a regulatory agency to leave an industry to guess at the meaning of the law through a maze of disjointed statements and vague guidance.”
Court filing
Thurston and Krohn also highlighted the SEC’s ambiguous stance on the Green Boxes, stating that the regulator had not confirmed whether the “boxes” qualify as investment contracts.
However, the presiding judge ruled that the defendants could not substantiate their claims and failed to counter the SEC’s arguments.
The SEC’s Broader View on Securities
Beyond mining equipment, the SEC has classified the sale of NFTs as unregistered securities transactions, as revealed during the indictment of a media company for selling non-fungible tokens without proper registration.
Additionally, the SEC has indicated to digital marketplaces that some NFTs may fall under the category of unregistered securities. Regulatory actions in this area highlight a focus on non-fungible tokens, although scrutiny of other cryptocurrencies frequently extends to tokens beyond Bitcoin.
Clarification on Cryptocurrency Regulations
The SEC’s classification of cryptocurrencies as securities is guided by the Howey Test, a legal standard established in 1946. This test evaluates whether an asset is a security based on initial sales, fundraising efforts, ongoing development promises, and promotional activities conducted via social media.
In a recent amended complaint regarding Binance, the SEC indicated it never designated specific tokens as securities but rather assessed the entirety of contracts and agreements surrounding the assets. This statement contradicts previous assertions made by the SEC Chairman regarding the status of tokens as securities, arguing that investor expectations are similar to those of shareholders in publicly traded companies.
This rationale underpins the SEC’s actions against Green United for promoting investments in Green Boxes with the expectation of financial returns.
