USA – CALIFORNIA Trends and Developments Contributed by: Bahram Seyedin-Noor, Jared Kopel, Joshua Korr and Monica Eno, Alto Litigation
es that Raz falsely told potential investors that the company used AI to help clients find diverse and under-represented candidates to fulfil their DEI hiring goals. Specifically, marketing materi- als provided to potential investors claimed that Joonko’s technology was based on “seven dif- ferent AI algorithms” and provided an “automat- ed recruiting solution”. In a public interview posted on the website “Unite AI”, Raz also boasted that the matching of candidates by Joonko was “automated from end to end”. According to the allegations in the complaint, Joonko’s platform did not have any of these capabilities. The SEC’s enforcement action against Ilit Raz marks the first time it has alleged AI washing in connection with state- ments made to private investors. Cryptocurrency continues to be targeted Cryptocurrency companies have been a favour- ite target of the SEC in recent years, which makes California a fertile hunting ground. The typical SEC action alleges that the defend- ant company engaged in distribution of digital assets (or tokens) that were securities and that the offer and sale of the assets was therefore in violation of Sections 5(a) and (c) of the Securities Act of 1933. Those provisions require securities being offered for sale and/or sold to be regis- tered with the SEC unless there is an applicable exemption. The SEC’s position is that the digital assets being sold are an investment contract – a form of security – under the US Supreme Court’s decision in SEC v WJ Howey, Co, 328 US 293 (1946) and various SEC pronouncements. The relief sought by the SEC varies. In some cases, the SEC will demand that the company register the digital assets with the SEC. In other instances, the SEC demands that the company take control of the tokens that have been dis-
tributed and/or halt the secondary trading of the tokens on all trading platforms. In further cases still, the SEC has alleged that the defendants engaged in fraudulent practices in violation of Section 17(a) of the Securities Act of 1934 and Section 10(b) of the Securities Exchange Act of 1934. The actions sometimes are accompanied by disgorgement and penalties as well. One 2023 case that attracted a great deal of attention was the SEC’s action against San Fran- cisco-based Ripple Labs, Inc (“Ripple”) and its senior officers, Bradley Garlinghouse and Chris- tian A Larsen. The action, filed in the Southern District of New York, alleged that the defendants sold more than 14.6 billion units of digital asset “XRP” in return for cash consideration worth more than USD1.38 billion. The SEC asserted that XRP was a security that should have been registered with the SEC. On 13 July 2023, Judge Analisa Torres held that the corporation’s sales of XRP to institutional investors constituted investment contracts and violated Section 5 of the Securities Act. However, the court also held that the company’s program- matic sales of XRP to public buyers on digital asset exchanges did not constitute investment contracts, as they did not lead those buyers to have a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. For the same reason, the sales of XRP by Garlinghouse and Larsen could not be considered investment contracts. The SEC has appealed aspects of the Ripple decision. However, in late 2023, Judge Rakoff in the Southern District disagreed with Judge Torres and held that various cryptocurrency tokens sold by Terraform Labs (“Terraform”) were securi- ties because token purchasers had a reason- able expectation of profit based on Terraform’s
1478 CHAMBERS.COM
Powered by FlippingBook