Is purchasing real estate with crypto a securities violation?

[Peter Walther]

I thought I'd re-post this review of a GA decision in a lawsuit involving a breached contract.

Shea v. Best Buy Homes LLC, 533 F.Supp.3d 1321 (N.D.Ga. Mar. 30, 2021)

Agreement to pay purchase price for real estate in cryptocurrency is securities act violation

Mary Shea owned a house in Georgia and listed it for sale. She received and accepted an offer to purchase from the defendant which provided that “30% OF PURCHASE PRICE [WAS] TO BE PAID WITH TROPTIONS.GOLD CRYPTOCURRENCY.” She alleged that she believed she would be able to immediately convert the cryptocurrency into cash.

However, on the closing date she was told that she would need to open a “cryptocurrency wallet.” No one, including the real estate brokers and the defendant, would assist her in converting the digital currency into cash, so she refused to close the sale. The defendant then sued her for breach of contract and filed a lis pendens. She removed the case to federal court. The defendant dismissed the contract action, but she filed an action for damages resulting from the lis pendens and the delay in selling her house.

The court rejected her claims of fraud, negligent misrepresentation, and promissory estoppel. However, it granted her request for a declaratory judgment that the contract was void and illegal based on its violation of the Georgia Uniform Securities Act.

That act, like its federal counterpart, prohibits the sale of unregistered securities. Thus, the question was whether the defendant has contracted to sell an unregistered security. The standard definition of a security derives from the famous case of SEC v. W.J. Howey Co., 328 U.S. 293 (1946): (1) an investment of money (2) in a common enterprise (3) with the expectation of profits to come solely from others’ efforts.

(1) The first prong was easily met. Even though the plaintiff was selling her house rather than paying cash for the cryptocurrency, her exchange of an asset was sufficient to constitute an investment of money.

(2) Is cryptocurrency a common enterprise? The defendant had attached an information sheet to his offer that contained such statements as “Troptions has purchased over 1.8 billion dollars of assets using Troptions,” “people use the coins to purchase goods and services,” “Troptions can be used daily for your needs,” “Troptions continues to go up in value each day,” and “Troptions has a team of proven experts you can contact and get your questions answered.”

Troptions’ web site states that Troptions are “serviced and managed by TROPTIONS CORPORATION,” which “exists to facilitate the usefulness and utility of TROPTIONS for the holders by: 1. [p]roviding education and assistance in the best practices of TROPTIONS use[;] 2. [i]ncreasing the marketplace for TROPTIONS purchases[;] [and] 3. [p]romoting increased visibility and value of TROPTIONS in national and international trading markets.”

(3) Was there an expectation of profits from the efforts of others? Other websites promoting Troptions stated

that they are “[d]eveloping an ECO-SYSTEM of vendors accepting Troptions (car dealerships, fast food chains, legal services, ATM machines etc.)”; are “coming out with a credit card this fall so you can use your TROPTIONS to purchase merchandise”; and “will ‘do the due diligence for our investors,’ ‘purchase large quantities of coins at a discounted rate,’ and ‘sell the private coins to our investors below market value.’ ” And a photo posted on the “Troptions Marketplace” Facebook page shows a man standing in front of a BMW with a caption that states “Just paid all Troptions for this BMW X5 in LA!!”

The court concluded, “the Complaint alleges statements that characterize Troptions as an appreciating asset and convey that Troptions holders can rely on the promoters to see an increase in value and use. Thus, the Court finds that the there is a common enterprise with the expectation of profits to come solely from others’ efforts.”

Since the Georgia securities act provides a private right of action to persons injured by violations, the court had no difficulty sustaining the plaintiff’s claim for damages.

COMMENT: In this case, the particular cryptocurrency’s own literature, web page and Facebook page provided the evidence of “expectation of profits” that ultimately proved it was a security. Would the same result follow if that expectation had been created, not by the promoters of the cryptocurrency themselves, but only by thousands of others on social media? It’s an interesting question. The Howey definition seems to require only that the expectation exist! If so, is every sale of cryptocurrency a sale of an unregistered security?