Securities And Exchange Commission v. NAC Foundation, LLC

Background

The Securities and Exchange Commission (SEC) sued NAC Foundation, LLC and Marcus Rowland Andrade over the sale of ABTC tokens in an initial coin offering. The SEC alleged that the defendants fraudulently and unlawfully sold unregistered digital securities in violation of the Securities Act of 1933 and the Securities Exchange Act of 1934.

The defendants’ October 2017 white paper described ABTC tokens as temporary tokens that could later be exchanged one-for-one for AML BitCoin. The white paper stated that the tokens could be traded and could increase in value through speculative trading. The initial coin offering ran from October 2017 through February 2018, although the complaint alleged that the relevant conduct extended from at least August 2017 through December 2018. Participants exchanged money or other digital assets for ABTC tokens. The defendants planned to raise $100 million but raised $5.6 million, primarily from about 2,400 retail U.S. participants. The SEC alleged that the defendants never registered ABTC or AML BitCoin as securities.

The SEC sought repayment of the offering proceeds, monetary penalties, and an order barring further securities-related activity. The defendants moved to dismiss the entire action under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim.

Evidence Outside the Complaint

The court explained that a Rule 12(b)(6) motion ordinarily must be decided from the complaint itself. It allowed consideration of Andrade’s patents through judicial notice because the patents were public records whose contents could be accurately determined. The court did not consider declarations from NAC Foundation employees because they were not part of the complaint and did not form its basis.

The court also refused to incorporate the initial coin offering’s “Terms and Conditions.” The complaint did not refer to that document extensively, and the document did not form the basis of the SEC’s claims. The court stated that, if the defendants’ interpretation of the document proved true, it could provide a defense later, but it could not be used to dismiss the complaint at the pleading stage.

Whether ABTC Was Plausibly an Investment Contract

The court applied the Howey test, which asks whether a transaction involves an investment of money in a common enterprise with an expectation of profits produced by the efforts of others. The defendants disputed the second and third parts of that test.

For the common-enterprise requirement, the court found it plausible that the defendants’ fortunes were linked to those of the purchasers. The purchasers provided capital for the project, while the defendants retained a substantial number of tokens. The offering proceeds were to fund development of the AML BitCoin system, and ABTC tokens could eventually be redeemed for AML BitCoin. The court concluded that the alleged relationship plausibly established the required connection between investor and promoter fortunes.

For the expectation-of-profits requirement, the court found that the white paper led participants to expect that ABTC and AML BitCoin could be traded and increase in value. At the time of the transactions, ABTC allegedly had no practical use other than online trading, apart from its future redemption possibility. The court also found it plausible that purchasers expected their trading success to depend on the defendants’ efforts to develop and promote AML BitCoin.

The court rejected the defendants’ additional arguments that the offering involved forward contracts outside the SEC’s authority and that the SEC acted with malicious intent. It concluded that the SEC had adequately pleaded the sale of an unregistered security.

Disposition

The court denied the defendants’ motion to dismiss. This was a pleading-stage ruling that allowed the SEC’s claims to proceed; the order did not resolve the ultimate merits of the alleged violations or award the requested remedies.