## Facts

- The SEC sued NAC Foundation, LLC (a blockchain development company) and its founder/CEO, Rowland Marcus Andrade, over sales of digital tokens tied to a proposed cryptocurrency called “AML BitCoin.”
- NAC marketed AML BitCoin as a cryptocurrency with built-in anti–money-laundering and know-your-customer features and claimed it would be compliant with U.S. laws.
- Because the blockchain and technology were allegedly still under development, purchasers received “ABTC” tokens as stand-ins for future AML BitCoin.
- The SEC alleged that from at least August 2017 through December 2018, defendants raised at least $5.6 million from roughly 2,400 retail investors, primarily in the United States, through token sales.
- The SEC alleged defendants made materially false or misleading statements, including that the touted compliance and security capabilities existed, that government agencies were negotiating to use AML BitCoin, and that defendants were close to running a Super Bowl advertisement.
- The SEC further alleged Andrade directed a market-manipulation strategy to increase trading volume and price and diverted about $1.1 million of offering proceeds for personal use.
- The SEC filed the enforcement action alleging violations of federal securities registration and antifraud provisions; defendants moved to dismiss under Rule 12(b)(6), arguing the tokens were not securities and the fraud claims were inadequately pleaded.

## Issues

1. Whether the complaint plausibly alleged that ABTC/AML BitCoin tokens were “securities” as investment contracts under the Howey test.
2. Whether the SEC adequately pleaded securities fraud (including material misstatements/omissions and scienter) with the specificity required by Rule 9(b) and the PSLRA.
3. Whether the SEC adequately pleaded an unregistered offer and sale of securities under Securities Act § 5.

## Decision

- The court denied defendants’ motion to dismiss in full.
- The court held the SEC plausibly alleged the tokens were investment contracts and therefore “securities.”
- The court held the SEC plausibly alleged antifraud violations and met heightened pleading requirements at the motion-to-dismiss stage.
- The court held the SEC adequately pleaded an unregistered offering, including lack of a registration statement and no exemption.

## Legal Principles

- Whether a digital token is a “security” turns on the transaction’s economic reality and the Howey investment-contract factors: (1) investment of money, (2) common enterprise, (3) reasonable expectation of profits from the efforts of others.
- Token labels (e.g., “utility token”) do not defeat securities status when marketing and structure plausibly present an investment opportunity dependent on the issuer’s managerial efforts.
- Fraud-based securities claims must plead with particularity the alleged misstatements/omissions and facts supporting a strong inference of scienter; detailed allegations tied to specific offering materials can satisfy Rule 9(b) and the PSLRA at the pleading stage.
- A Securities Act § 5 claim is plausibly stated by alleging an offer or sale of securities to the public without an effective registration statement and without an applicable exemption.

## Conclusion

The court allowed the SEC’s enforcement action to proceed, finding the complaint plausibly alleged the ICO involved investment-contract securities and sufficiently pleaded both unregistered-offering and fraud claims under federal securities laws.


SEC v. NAC Found., L.L.C., 512 F. Supp. 3d 988 (N.D. Cal. 2021)