Veritaseum CEO Reginald Middleton has hit back at the Securities and Exchange Commission lawsuit that claims their $15 million token sale was illegal. Middleton filed a 423-page response today in the US District Court for the Eastern District of New York, alleging that the SEC is “twisting” the facts about its token, called VERI, and asking for dismissal of the complaint.
The Veritaseum CEO 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.
The SEC’s Cyber Unit last week 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 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 while called one of Middleton’s other projects as an outright securities fraud that doesn’t differ from a typical pyramid or Ponzi scheme.
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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 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.
The statement further reads:
“In 2017 and early 2018, Veritaseum sold digital “utility tokens,” called Veritas or VERI tokens, which immediately enabled token holders to acquire Veritaseum’s research reports and, as the business expanded, to gain access to the company’s software platform. The tokens are not investments and are not securities. They do not represent an ownership interest in Veritaseum or its assets; do not give holders any right to share in the company’s profits; do not confer voting rights; and do not pay dividends or interest. Numerous token holders have used their tokens to avail themselves of the Veritaseum’s unique products and services, which the company has continually expanded and improved.”
How to figure out if an ICO token is a security
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.