New York’s Blue-Sky Law Shines on Cryptocurrency Platforms

October 24, 2021

Using New York’s Martin Act, a blue-sky law, New York’s Attorney General, Letitia James, ordered two leading crypto platforms to cease their activities within the state. The Attorney General’s announcement indicates that the platforms received an advanced warning that they must register with the Office of the Attorney General but did not comply. In addition to shutting two cryptocurrency platforms, the Attorney General ordered two additional platforms to provide information on their activities within New York. Further, James claims the Office of the Attorney General possesses evidence of unlawful selling or offering of securities or commodities by the platforms.

While today there are blue-sky laws in 40 states, New York distinguishes its blue-sky law by its unusually broad scope and methods of implementation and enforcement.

What is the Martin Act?

In 1917 the term “blue-sky” law was first used by the U.S. Supreme Court in Hall v. Geiger-Jones Co. and was coined by advocates of the first blue-sky law, enacted in 1911 in Kansas, who sought to protect investors from securities backed by nothing but the blue-sky. In the decade that followed Kansas’s blue-sky law, many states adopted similar securities laws to protect consumers, and New York passed its blue-sky law, the Martin Act, in 1921.

While today there are blue-sky laws in 40 states, New York distinguishes its blue-sky law by its unusually broad scope and methods of implementation and enforcement. Unlike other states’ blue-sky laws, the Martin Act charges the Attorney General rather than regulatory agencies with implementation and enforcement. Under the Martin Act, the Attorney General bears sole responsibility for implementation and enforcement, which vests both regulatory and remedial authority to detect, prevent, and stop fraudulent securities practices with the Attorney General (CPC International Inc. v. McKesson). The Martin Act prohibits fraud or misrepresentation when a company publicly offers, sells, and purchases securities and commodities. Additionally, the Martin Act gives the attorney general the power to conduct investigations, issue subpoenas, and demand the production of documents without a grand jury or probable cause. Former New York Attorney General Dennis Vacco captured the scope of the Martin Act when he stated: “[t]he Martin Act gives really broad powers . . . [it] really does apply to almost any financial transaction in New York state.”

How did a Blue-Sky Law Aimed at Securities Reach Leading Cryptocurrency Platforms? 

Critics of the Martin Act argue that its vast scope allows New York to circumvent the U.S. Securities and Exchange Commission (SEC) when protecting consumers against fraud. For example, Martin Act violations do not depend on the sale or purchase of a security, and mere material misrepresentation or omission that involves a security fall under the Act’s sprawling reach. So, should crypto enthusiasts start to panic that New York’s blue-sky law has circumvented the SEC? No, probably not, but confusion over cryptocurrency and securities is warranted.

New York is likely not sidestepping SEC in targeting leading cryptocurrency platforms under the Martin Act. There is a lack of clarity in labeling cryptocurrency as securities, so therefore attention on New York for using an extremely broad securities law to address cryptocurrency platforms’ actions seems warranted. When cryptocurrency “coins,” which are also called “tokens,” are brought to the market in Initial Coin Offerings (ICOs), the SEC has stated this may be securities offerings. Further, SEC Chair Gary Gensler has indicated that he believes that every ICO is a security offering.

Additionally, cryptocurrency is evaluated under the Howey Test to determine if an “investment contract” is created, which, if so, subjects the cryptocurrency to federal securities laws. The Howey Test stems from the U.S. Supreme Court case S.E.C. v. Howey Co., where the Court identified four criteria to determine whether an “investment contract” exists: (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profit, (4) to be derived from the efforts of others. The crypto community is well versed in the Howey Test, to the point of fixation, and keeps a watchful eye on situations that treat cryptocurrency as securities. However, New York appears to be following the SEC’s lead in protecting consumers from leading cryptocurrency platforms’ deceitful actions and mere involvement in securities, such as ICOs, subjecting the platforms to the Martin Act. 

In September of 2021, the SEC filed an action against leading platforms and their top executives in a situation that rings familiar to New York’s use of the Martin Act. SEC’s complaint, filed in the United States District Court for the Southern District of New York, alleges fraudulent and unregistered offerings and sales of securities in connection to investments in a program of BitConnect, an online leading crypto platform. BitConnect allegedly defrauded global investors out of two billion dollars.

While cryptocurrency platforms and enthusiasts should not be alarmed with blue-sky laws being used to address misconduct in the blockchain community, they should take notice of New York’s Attorney General’s words: “[c]ryptocurrency platforms must follow the law, just like everyone else . . . [the Office of the Attorney General’s] actions . . . send a message that we will not hesitate to take whatever actions are necessary against any company that thinks they are above the law.”

Chris Kenney

Chris is a member of the Broun National Trial Team (BNTT) and the Journal of Law & Technology (JOLT). Prior to attending the University of North Carolina School of Law, Chris served as an Army Officer. Upon graduation, Chris plans to pursue a career in litigation.