Mining Machines Are Securities? Reviewing the Green United Case

 

1. Unraveling the Green United Case: A Crypto Minefield

 

In 2023, the U.S. Securities and Exchange Commission (SEC) launched a landmark lawsuit against crypto firm Green United LLC, accusing it of perpetrating large-scale fraud via the sale of “Green Boxes” crypto mining machines, with the case involving a staggering $18 million. The SEC’s complaint explicitly demanded: a permanent injunction barring the defendants from participating in the suspected securities transactions and business activities, the confiscation of their ill-gotten gains, and a prohibition on Krohn and Thurston from engaging in any unregistered securities offerings (including crypto asset securities). According to the September 23, 2024, ruling, Judge Ann Marie McIff Allen found that the SEC had sufficiently demonstrated that the combination of Green Boxes and custody agreements constituted securities, and that the defendants had fabricated the appearance of investment returns through false statements, ultimately supporting the SEC’s penalty demands.

 

The core of this scam lay in crafting a seemingly perfect investment trap: investors were induced to pay $3,000 for mining machines, with the defendants promising monthly returns of $100, translating to an annualized return of a whopping 40%-100%. However, the reality was far from rosy: Green United did not actually employ the rigs for mining but instead purchased undeveloped “GREEN” tokens to masquerade as returns, which ultimately became worthless due to a lack of secondary market liquidity.

 

Green United’s business model was highly deceptive: on the one hand, it used hardware sales as a front, and on the other hand, it deeply bound investors through custody agreements. According to the agreements, Green United claimed it would “do all the work” to achieve the expected returns, and this “promise + control” model became the core of the case. In September 2024, U.S. District Judge Ann Marie McIff Allen ruled that the combination of mining machines sales and custody agreements constituted securities transactions, meeting the definition of an investment contract as established in the 1946 SEC v. W.J. Howey Co. case. This ruling not only overturned the defendants’ defense that “no securities transactions were involved” but also explicitly brought crypto mining machines into the scope of securities regulation.

 

2. Analysis of the Key Issues: Why Mining Machines Transactions Are Deemed Securities

 

– The Dilemma of Applying the Howey Test

 

The four elements of an investment contract established by the U.S. Supreme Court in the Howey case are: investment of money, common enterprise, expectation of profit, and profits derived from the efforts of others. The core of Green United’s defense lay in emphasizing the attribute of mining machines as “end-user consumables,” arguing that the profit promises in the custody agreements were commercial incentives rather than securities issuance, and that there was no common enterprise required for securities. However, in this case, Judge Allen’s ruling broke with traditional understanding, particularly through a review, determining that the association between control rights and the source of profits had transcended the scope of commodity transactions. That is, the profits from the custody agreements had the nature of securities investment returns, ultimately bringing mining machines transactions within the scope of a common enterprise. The specific determinations of this judge are as follows:

 

① Investment of Money: Investors paid $3,000 for the mining machines, meeting the element of investment of money;

 

② Common Enterprise: The profits of the investors did not stem from the mining capabilities of the rigs themselves, but rather depended on Green United’s control and operation of the system, forming a common enterprise between the investors and the promoters;

 

③ Expectation of Profit: The promise of a super-high return rate of 40%-100% far exceeded the normal commercial investment return, meeting the characteristic of “expectation of profit”;

 

④ Profits from the Efforts of Others: Green United promised to “do all the work,” with investors not participating in operations, and profits entirely dependent on the efforts of the promoters.

 

– Diverse Interpretations from Legal Experts

 

Despite the settled court judgment, there remains significant divergence in the legal community regarding this case. Some argue that this was a specific instance of fraud. For example, Ishmael Green, a partner at Diaz Reus law firm, pointed out that the SEC’s charges targeted Green United’s false advertising and the design of the custody agreements, not the sale of mining machines themselves. As long as mining machines are sold in the form of “end-user consumption,” they can still avoid being classified as securities. More importantly, this ruling has also sparked intense discussions among practitioners in the crypto industry and legal scholars regarding the Howey Test. Supporters argue that this case embodies the core principle of the Howey Test, which is “substance over form”—although mining machines are physical commodities, the strong association between the promoters’ absolute control over the system and profits constitutes the substantive characteristic of a “common enterprise.” Opponents caution that if this logic holds, all hardware sales with profit promises (such as when companies sell equipment with attached profit-sharing clauses) could be deemed securities, leading to blurred boundaries in the application of the law. This divergence essentially reflects the deep challenges faced by crypto asset regulation: how to balance investor protection with the encouragement of technological innovation. There is an urgent need for judicial precedents to further clarify standards, such as specifying that when commodity sales are accompanied by profit promises, they must simultaneously meet conditions like “decentralized operation” (e.g., users can independently decide on node operations) and “risk sharing” (e.g., investors must bear equipment maintenance costs) to exclude the attribute of securities.

 

– Other Crypto Asset Securities Classification Cases for Reference

 

Ripple Case

 

The SEC accused Ripple of financing through the sale of XRP as the issuance of unregistered securities. The court determined, based on the Howey Test, that the sale of XRP to institutional investors met the definition of securities. Specifically, Ripple explicitly linked the value of XRP to its own development in promotional materials (e.g., “The Ripple protocol becoming a pillar of global payments will significantly increase the demand for XRP”), and investors’ purchases constituted a financial investment in a common enterprise, with profit expectations entirely dependent on Ripple’s team for technological development and market promotion. However, programmatic sales in the secondary market were not deemed securities due to the lack of profit promises and direct association between investors and the issuing party. This case first clarified the determinative impact of transaction scenarios on the classification of crypto assets.

 

Terraform Case

 

The court determined that UST and LUNA met the definition of securities, with the core basis being the standard of “profits derived from the efforts of others.” Although UST adopted an algorithmic stability mechanism, Terraform’s continuous disclosure of information (such as white paper promises of “UST pegged to the U.S. dollar at 1:1”) and public endorsements by founder Do Kwon created a reasonable expectation among investors that “profits stemmed from the efforts of the Terra team.” The judge specifically noted that the degree of decentralization is not an exclusionary criterion for the attribute of securities— as long as there is “promoter-led marketing and profit promises,” even if asset transactions are executed entirely through smart contracts, they may still be subject to regulation.

3. The Future of Crypto Asset Securities Classification

 

Green United transformed the profits from mining machines into a financial attribute through custody agreements, causing investors to essentially participate in a “common enterprise” reliant on promoter operations, rather than the mining machines as hardware themselves. In the short term, this case has had a certain deterrent effect on fraudulent crypto projects, helping to protect the interests of crypto asset investors. In the long term, this case contributes to the evolution 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 radical changes. Simply applying the Howey Test no longer meets regulatory needs; instead, the specific form of projects should be dynamically considered, balancing technological innovation with lawful regulation. In summary, the healthy development of the crypto market cannot do without an in-depth dialogue between legal rationality.