- The SEC has won a summary judgment against Rivetz Corp over its ICO, which took place in 2017
- Rivetz sold RvT tokens, claiming they were a functional product, but the court found them to be unregistered securities under the Howey Test
- Rivetz CEO Kevin Sprague failed to convince the court that the tokens did not require registration, leading to a ruling in favor of the SEC
The U.S. Securities and Exchange Commission (SEC) has secured a summary judgment in a long-running case against Rivetz Corp., Rivetz International SEZC, and their CEO, Steven Sprague. The court ruled that the company’s 2017 Initial Coin Offering (ICO) of RvT tokens violated the Securities Act by offering unregistered securities, despite Sprague’s argument that the tokens were merely a functional product. The ruling brings to an end the case, which dates back to the 2017-18 ICO mania.
Seven Years in the Making
The SEC initiated the lawsuit in 2021, alleging that Rivetz Corp. and its CEO, Steven K. Sprague, conducted an unregistered securities offering when they launched their 2017 ICO. Rivetz promoted the RvT tokens as part of a security ecosystem for mobile devices, marketing the tokens as a crucial part of their blockchain-based cybersecurity solution.
However, according to the SEC, these tokens qualified as investment contracts under the Securities Act, which required them to be registered. Rivetz failed to file a registration, which the SEC contended was a clear violation of the law:
The SEC alleged that the RvT tokens were marketed to investors with the promise that their value would increase as Rivetz’s technology developed. These promises created an expectation of profit, which is one of the key elements of an investment contract under the Howey Test.
Sprague Defended Himself
Sprague, defending himself in court, argued that the RvT tokens were functional software products rather than securities and thus did not need to be registered under the Securities Act. However, the court did not find his argument convincing:
While Sprague asserted that the tokens were merely a product, the court found that their true nature was as securities, given the economic realities surrounding their promotion and sale.
Judge Mark Mastroianni also pointed out that the tokens had no intrinsic utility at the time of the ICO, and their value depended entirely on the future success of Rivetz’s technology development, while he had something to say about Sprague’s decision to defend himself:
Sprague, proceeding pro se, failed to meet the burden of proof to establish that the RvT tokens were exempt from registration requirements.
Rivetz ICO “Clearly” Met Howey Criteria
Central to the court’s ruling was the application of the Howey Test, a legal standard used to determine whether a transaction qualifies as an investment contract, and thus a security, under U.S. law. The test involves three criteria: an investment of money, in a common enterprise, with the expectation of profits derived from the efforts of others. The court found that Rivetz’s ICO met all these criteria:
Rivetz’s ICO clearly involved an investment of money, as participants used real-world currency to purchase RvT tokens. The value of these tokens was entirely dependent on Rivetz’s ability to build the promised cybersecurity network, thereby fulfilling the common enterprise and expectation of profits elements.
The court granted the SEC’s motion for summary judgment, paving the way for the SEC to seek injunctive and monetary relief. The ruling is another example that the ICO mania of 2017 and 2018 was predicated on either a misapplication or ignorance of the Howey Test.
