A significant ruling from a U.S. court has declared that crypto mining boxes sold by Green United qualify as securities, thus confirming allegations made by the Securities and Exchange Commission (SEC).

In a recent report by Bloomberg Law, it was revealed that Green United was unsuccessful in persuading a federal court to dismiss a civil fraud lawsuit filed by the SEC. The regulatory body accused the company of providing misleading information to potential investors regarding the nature and profitability of their investments.

The crux of the lawsuit centers around the firm’s mining equipment, referred to as “Green Boxes,” which the SEC contends constitutes part of a securities transaction, thereby bringing the company under regulatory scrutiny.

What Is the Essence of the Fraud?

Back in March 2023, Green United, a mining company based in Utah, was under investigation for alleged fraudulent activities. As a result, the SEC charged the organization with violating the Securities Act by marketing and selling non-existent assets totaling an estimated $18 million.

The details surrounding this case were meticulously outlined in the SEC’s formal filing, which prominently featured two individuals: the company’s founder, Wright Thurston, and leading promoter, Kristoffer Krohn.

Thurston and Krohn marketed their business as a green mining initiative, promising clients lucrative investment opportunities in mining equipment with guarantees of returns that could reach up to 50% monthly. They set a minimum entry price of $3,000 for investors.

However, the SEC concluded that Green United had no actual involvement in green mining practices. Instead, it was discovered that the company diverted funds from clients to mine Bitcoin (BTC) for personal gain rather than as promised. This misleading approach exploited investors’ hopes of turning a profit through crypto mining.

“Unlike ERC-20 tokens (such as GREEN), certain crypto assets like Bitcoin use the process of mining to generate new tokens. With such crypto assets, a new token is mined as a reward for the miners who complete algorithms with cryptographic hash functions that verify new transactions on the Blockchain.”

The SEC firmly believes that Green United defrauded its investors by offering equipment purportedly tied to mining opportunities. According to the SEC’s account, the devices were sold with accompanying hosting agreements under the pretext that Green United would handle these “Green Boxes” for investors, all while promising significant returns. The U.S. District Court for the District of Utah, led by Judge Ann Marie McIff Allen, sided with the SEC on this matter.

Ultimately, the SEC revealed that Green United did not utilize its hardware for mining tokens as it had claimed. Instead, they successfully solicited $18 million from individuals seeking a profitable return from crypto mining endeavors. Rather than delivering on these investment promises, Green United reportedly purchased unmined tokens and deposited them into investors’ accounts to fabricate the appearance of active mining operations. According to the SEC, the mined currency represented by these operations held no tangible value, which constitutes the essence of the fraudulent activity.

Green United Claims No Investors Lost Money

In response to the SEC’s allegations, officials from Green United have asserted that no investors actually lost any money in this scandal. They denounced the claims made by the regulatory agency as groundless, arguing that the SEC is attempting to revise legal definitions by characterizing hosted mining operations as securities—a practice they assert is standard even among publicly traded companies.

In May, the executives of Green United sought to dismiss the SEC’s lawsuit, claiming that Congress had already analyzed and ultimately rejected the notion of SEC authority over the cryptocurrency sector. They criticized the SEC for being “vague and inconsistent” in its measures aimed at regulating the crypto industry through enforcement actions.

“It is fundamentally unfair and unconstitutional for a regulatory agency to leave an industry to guess at the meaning of the law from its hodgepodge of disjointed statements, inconsistent application, vague testimony, and unhelpful guidance.”

Court filing

Furthermore, both Thurston and Krohn raised questions about the SEC’s ambiguous stance on the legitimacy of the Green Boxes, arguing that the regulator had not definitively classified these “boxes” as either investment contracts or products.

However, the presiding judge concluded that the defendants failed to provide sufficient evidence to establish their innocence or to refute the claims made by the SEC.

What Else Does the SEC Consider Securities?

Beyond mining hardware, the SEC has similarly categorized the sale of non-fungible tokens (NFTs) as transactions involving unregistered securities since August. This development came to light during the indictment of Impact Theory, a media company found guilty of selling NFTs as unregistered securities.

Additionally, the SEC has informed OpenSea, one of the largest NFT marketplaces, that certain NFTs listed on their platform could potentially be classified as unregistered securities. Moreover, the regulatory body took action against Flyfish Club, LLC for conducting unregistered offerings of cryptocurrency securities through the sale of NFTs.

Nevertheless, while regulatory scrutiny has increased around NFTs, actions against them remain less frequent in comparison to the regulatory stance toward tokens. Typically, the SEC has maintained that all cryptocurrencies, save for Bitcoin, should be viewed as securities.

SEC Clarifies the Definition of Securities for Cryptocurrencies

When characterizing cryptocurrencies as securities, the SEC relies on the Howey test—a somewhat antiquated legal framework first established in 1946. This test, named after the SEC’s groundbreaking lawsuit against W.J. Howey, assesses whether an asset fits the definition of a security based on various factors, including initial sales, fund-raising efforts, ongoing promises of development, and promotional activities carried out through social media to underline the benefits and attributes of the asset.

Earlier in September, the SEC amended its complaint against Binance, stating it never treated specific tokens as securities; instead, they considered the collection of contracts, expectations, and agreements associated with the assets. This statement stands in stark contrast to SEC Chairman Gary Gensler’s assertion that tokens are considered securities due to the presence of a developer group whose efforts the public anticipates will yield profits. He explained that just as shareholders expect returns from public companies, crypto investors hope for profits stemming from the developers’ efforts.

This foundational reasoning elucidates the SEC’s aggressive stance on Green United, where the company enticed investors by offering opportunities to invest in these Boxes while promising substantial profits.

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