Crypto Mining ‘Boxes’ Are Securities, Court Says in SEC Case

Green United LLC failed to persuade a federal court to toss an SEC civil fraud suit against it on grounds that its cryptocurrency mining “box,” or hardware, customers didn’t enter into securities transactions with it.

The Securities and Exchange Commission “has sufficiently alleged a security in the form of Green Boxes (computer hardware) coupled with a hosting agreement to operate the Green Boxes,” Judge Ann Marie McIff Allen said for the US District Court for the District of Utah.

The inquiry is distinct from whether digital assets themselves—and transactions involving them—satisfy the test for investment contracts under the US Supreme Court’s 1946 opinion SEC v. W.J. Howey Co. and are therefore securities. The crypto industry has been litigating that issue in numerous cases.

The SEC says that Green United’s mining equipment and software didn’t actually mine digital tokens as promised to investors who entrusted $18 million to the company. Green United eventually purchased unmined tokens and distributed them to the investors’ accounts “to create the appearance of a successful mining operation,” the commission says.

Green United’s currency—called GREEN—"had no realizable value as it was not trading in a secondary market,” the SEC says.

The suit is among recent enforcement cases against crypto-related companies in which the agency has alleged outright fraud.

Green United contested the allegations in an emailed statement at the time the enforcement action was filed. The suit doesn’t “contain a single allegation of a single victim or even an investor losing any money,” it said.

“Additionally, they try to change the law by classifying hosted mining as a security, a practice performed by numerous public companies,” Green United said in its statement.

‘Common Enterprise’

Allen rejected the company’s effort to rid itself of the suit on the basis that no securities transactions were involved. The Howey court defined an “investment contract"—a form of security under the Securities Act—by reference to whether “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party,” the judge said.

In the Green United suit, the disputed issue was whether the SEC adequately alleged a “common enterprise,” she said.

The SEC did so, Allen said. “Specifically, the Complaint alleges investors could invest $3,000 to receive a Green Box, which purportedly generated returns of '$100 each month,’ ‘a 40% to 50% return,’ or ‘100%+ ROIs’ by mining a cryptocurrency called ‘GREEN,’” she said. The company and its principals allegedly promoted a hosting agreement, “which provided that Green United will be ‘doing all the work’ to generate the stated return.”

Those and other allegations “are sufficient to allege all elements of an investment contract, including a common enterprise,” the judge said.

Allen also rejected arguments that the SEC hadn’t adequately alleged fraud or that there were constitutional problems with the suit.

The SEC represents itself. Fields Legal PLLC and Davis Wright Tremaine LLP represent Green United.

The case is SEC v. Green United, LLC, 2024 BL 333691, D. Utah, No. 2:23-cv-00159, 9/23/24.