Are mining machines also securities? Review of the Green United case

Author: FinTax

1. Case facts: A well-designed crypto scam

In 2023, the U.S. Securities and Exchange Commission (SEC) launched a landmark lawsuit against the crypto company Green United LLC, accusing it of large-scale fraud by selling cryptocurrency mining machines called "Green Boxes", involving an amount of up to $18 million. In the complaint, the SEC explicitly requested: permanently prohibit the defendants from participating in the alleged securities transactions and business activities, confiscate their illegal gains, and prohibit Krohn and Thurston from participating in any unregistered securities offerings (including crypto asset securities). According to the ruling on September 23, 2024, Judge Ann Marie McIff Allen determined that the SEC had fully proved that Green Boxes, combined with the custody agreement, constituted securities, and that the defendants created the illusion of investment returns through false statements, and ultimately supported the SEC's request for punishment. The core of this scam is to build a seemingly perfect investment trap: after investors pay $3,000 to buy mining machines, the defendant promises to earn $100 per month, with an annualized return rate of up to 40%-100%. However, the truth is far from so beautiful: Green United did not use the mining machines for actual mining, but disguised them as income by purchasing unmined "GREEN" tokens, and eventually these tokens completely lost their value due to lack of secondary market liquidity. Green United's business model is extremely confusing: on the one hand, it uses hardware sales as a cover, and on the other hand, it deeply binds investors through custody agreements. According to the agreement, Green United claims to "complete all the work" to achieve the expected returns. This "commitment + control" model has become the core of the case dispute. In September 2024, Ann Marie McIff Allen, a judge of the Utah District Court, ruled that the sale of mining machines combined with the custody agreement constituted a securities transaction, which met the definition of an investment contract in the 1946 SEC v. W.J. Howey Co. case. This ruling not only overturned the defendant's defense that "no securities transaction was involved", but also clearly included crypto mining machines in the scope of securities supervision. 2. Analysis of the focus of the dispute: Why are mining machine transactions considered securities? 2.1 Dilemma in the application 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 capital, common cause, expected profits, and profits from the efforts of others. The core of Green United's defense is to emphasize the nature of mining machines as "commodities for end-users' own use", and to argue that the income commitments in the custody agreement are commercial incentives rather than securities issuance, and there is no common cause required for securities. However, in this case, Judge Allen's ruling broke through traditional cognition, especially through penetrating review, it determined that the correlation between control rights and income sources has exceeded the scope of commodity transactions, that is, the income in the custody agreement has the nature of securities investment income, and finally included mining machine transactions in the scope of common cause. The judge's specific judgment is as follows: Capital investment: The investor paid $3,000 to purchase the mining machine, which meets the capital investment element; Joint undertaking: The investor's income does not come from the mining ability of the mining machine itself, but depends on Green United's control and operation of the system, forming a joint undertaking between the investor and the promoter; Profit expectation: The ultra-high return rate commitment of 40%-100% far exceeds the normal commercial investment return and meets the "expected profit" feature; Efforts of others: Green United promises to "complete all the work", and investors do not need to participate in operations. Profits depend entirely on the efforts of the promoters.  

2.2 Multiple interpretations of legal experts 

Although the court's decision has been made, there are still significant differences in the legal community about this case. Some people believe that this is a specific fraud. For example, Ishmael Green, a partner at Diaz Reus Law Firm, pointed out that the SEC's allegations are aimed at Green United's false advertising and custody agreement design, and do not deny the sale of mining machines themselves. As long as the mining machines are sold in the form of "end-user self-use", they can still circumvent the securities characterization. More importantly, this ruling has also triggered heated discussions on the Howey test among crypto industry practitioners and legal scholars. Supporters believe that this case embodies the core meaning of the Howey test of "substance over form" - although mining machines are physical commodities, the absolute control of the system by the initiator in the revenue model and the strong correlation with profits have constituted the essential characteristics of a "common cause". Opponents warn that if this logic holds true, all hardware sales with profit promises (such as companies selling equipment with profit sharing clauses) may be considered securities, resulting in blurred boundaries of legal application. This divergence essentially reflects the deep challenges facing crypto asset regulation: how to strike a balance between protecting investors and encouraging technological innovation? In the future, it is urgent to further clarify the standards through judicial precedents. For example, when a product is sold with a profit promise, it must meet the conditions of "decentralized operation" (such as users can decide on node operations independently) and "risk sharing" (such as investors need to bear the cost of equipment maintenance) before it can be excluded from securities attributes. 2.3 References to other cases on the qualitative classification of crypto assets (1) Ripple case: The SEC accused Ripple of issuing unregistered securities by selling XRP. The court determined that the sale of XRP to institutional investors met the definition of securities based on the Howey test. Specifically, Ripple clearly tied the value of XRP to its own development through its brochures (e.g., "Ripple protocol becoming a global payment pillar will greatly increase XRP demand"). Investors' purchase behavior constituted capital investment in a common enterprise, and the profit expectations were entirely dependent on the Ripple team's technology development and market promotion. However, programmatic sales in the secondary market were not identified as securities due to the lack of profit commitments and direct connection between investors and issuers. This case clarified for the first time the decisive influence of trading scenarios on the qualitative characterization of crypto assets. (2) Terraform case: The court determined that UST and LUNA met the definition of securities, with the core basis being the "profit comes from the efforts of others" standard. Although UST adopts an algorithmic stabilization mechanism, Terraform has formed a reasonable expectation among investors that "profits come from the efforts of the Terra team" through continuous information disclosure (e.g., the white paper promises that "UST is pegged to the US dollar at a 1:1 ratio") and the public platform of founder Do Kwon. The judge specifically pointed out that the degree of decentralization is not an exclusion criterion for securities attributes - as long as there is "marketing and profit promises led by the promoter", even if the asset transaction is fully executed through smart contracts, it may still be included in the regulation. 3. The future picture of the qualitative characterization of crypto asset securities Green United alienates the mining machine income into financial attributes through the custody agreement, so that investors actually participate in the "common cause" that relies on the promoter's operation, rather than the mining machine itself as hardware. In the short term, this case has a certain deterrent effect on the fraudulent packaging of crypto projects, which is conducive to safeguarding the interests of crypto asset investors; in the long term, this case will help promote the iteration of the securities regulatory framework. With the emergence of new technologies and concepts such as crypto assets and smart contracts, traditional financial scenarios are undergoing earth-shaking changes. Simply applying the Howey test can no longer meet regulatory needs, but should dynamically consider the specific form of the project and balance the relationship between technological innovation and legal supervision. In short, the healthy development of the crypto market is inseparable from the in-depth dialogue between legal rationality and technical logic. The qualitative future of crypto asset securities is gradually unfolding through such cases.