Insights on the SEC vs. Green United LLC Case: A New Milestone in the Classification of Encryption Assets as Securities

1. Case Overview: A Well-Planned Encryption Scam

In 2023, the U.S. Securities and Exchange Commission filed a lawsuit against the cryptocurrency company Green United LLC, accusing it of carrying out large-scale fraud through the sale of "Green Boxes" cryptocurrency mining machines, involving an amount of $18 million. On September 23, 2024, Judge Ann Marie McIff Allen made a ruling, finding that the defendants created a false impression of investment returns through misleading statements, supporting the SEC's request for penalties.

The core of this scam lies in the construction of a seemingly perfect investment trap: after investors pay $3,000 to purchase mining machines, the defendants promise a monthly return of $100, with an annualized return rate as high as 40%-100%. However, in reality, Green United did not use the mining machines for actual mining, but instead disguised profits by purchasing unmined "GREEN" tokens, which ultimately lost value due to a lack of liquidity in the secondary market.

The business model of Green United is highly deceptive: on one hand, it uses hardware sales as a facade, and on the other hand, it deeply binds investors through a hosting agreement. According to the agreement, Green United claims to "complete all work" to achieve expected returns, and this "commitment + control" model has become the core of the case controversy.

2. Analysis of Controversy Focus: Reasons for Mining Machine Transactions Being Classified as Securities

2.1 Applicability of the Howey Test

The four elements of an investment contract established by the U.S. Supreme Court in the Howey case include: investment of money, common enterprise, expectation of profits, and profits derived from the efforts of others. The core of Green United's defense lies in emphasizing the attribute of mining machines as "goods for end users' own use," asserting that the profit commitments in the hosting agreement are commercial incentives rather than securities issuance.

However, Judge Allen determined through a penetrating review that the correlation between control and source of income has surpassed the scope of commodity trading, bringing the mining machine transactions into the realm of joint ventures. The specific judgment is as follows:

1. Capital Investment: Investors pay 3000 USD to purchase mining machines, which meets the capital investment criteria.
2. Joint Venture: Investors' returns depend on Green United's control and operation of the system, forming a joint venture between investors and the initiators.
3. Profit expectation: A promise of ultra-high returns of 40%-100%, far exceeding normal commercial investment returns.
4. Efforts of Others: Green United promises to "complete all work", and investors do not need to participate in operations; profits rely entirely on the efforts of the initiators.

2.2 Multidimensional Interpretations by Legal Experts

Despite the court's ruling, there are still significant disagreements within the legal community regarding this case. Some viewpoints argue that this is a specific type of fraud, and does not negate the sales of mining machines themselves; as long as the mining machines are sold in the form of "for end-user personal use," they can still avoid being classified as securities.

This ruling has sparked heated discussions among cryptocurrency industry practitioners and legal scholars regarding the Howey test. Supporters argue that the case embodies the core principle of "substance over form" of the Howey test. Opponents warn that if this logic holds, all hardware sales with profit promises could potentially be classified as securities, leading to blurred legal applicability boundaries.

This divergence essentially reflects the deep challenges faced by the regulation of encryption assets: how to seek a balance between protecting investors and encouraging technological innovation? In the future, it will be necessary to further clarify standards through judicial precedents, for example, by specifying that when the sale of goods comes with promises of returns, it must simultaneously meet conditions such as "decentralized operation" and "shared risks" in order to exclude the characteristics of securities.

2.3 Other encryption asset securities qualitative case references

In the Ripple case, the court ruled that the sale of XRP to institutional investors met the definition of a security, while programmatic sales in the secondary market were not classified as securities due to the lack of revenue promises and the absence of a direct connection between investors and the issuer. This case clearly establishes the decisive impact of trading scenarios on the classification of encryption assets.

In the Terraform case, the court ruled that UST and LUNA meet the definition of securities, with the core basis being the "profits derived from the efforts of others" standard. The judge specifically pointed out that the degree of decentralization is not an exclusionary criterion for securities attributes— as long as there exists "promoter-led marketing and profit promises," even if asset transactions are fully executed through smart contracts, they may still be subject to regulation.

3. Future Prospects for the Qualitative Securities of Encryption Assets

The Green United case highlights the complexity of the qualitative assessment of encryption assets. In the short term, this case has a certain deterrent effect on fraudulent packaging of encryption projects, which is beneficial for protecting the interests of encryption asset investors; in the long term, this case helps to promote the iterative development of the securities regulatory framework.

With the emergence of new technologies and concepts such as encryption assets and smart contracts, traditional financial scenarios are undergoing a tremendous transformation. A simple application of the Howey test is no longer sufficient to meet regulatory needs; rather, it should dynamically consider the specific form of the project and balance the relationship between technological innovation and legal regulation.

The healthy development of the encryption market cannot be separated from the deep dialogue between legal rationality and technical logic. The future landscape of the classification of encrypted assets as securities is gradually unfolding through such cases. Regulatory agencies, the legal community, and the encryption industry need to work together to build a regulatory environment that both protects investors' rights and promotes technological innovation.