Is Mining Equipment Also a Security? A Review of the Green United Case
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Is Mining Equipment Also a Security? A Review of the Green United Case
Green United's business model is highly deceptive: on one hand, it uses hardware sales as a front; on the other hand, it deeply binds investors through托管 agreements.
Navigating Web3 tides with focused insightsAuthor: FinTax
1. Case Facts: A Well-Designed Cryptocurrency Scam
In 2023, the U.S. Securities and Exchange Commission (SEC) filed a landmark lawsuit against Green United LLC, a cryptocurrency company, accusing it of conducting large-scale fraud by selling cryptocurrency mining machines known as "Green Boxes," with approximately $18 million involved. The SEC specifically requested that the defendants be permanently prohibited from participating in alleged securities transactions and related business activities, that their illicit gains be forfeited, and that Krohn and Thurston be barred from involvement in any unregistered securities offerings—including those involving crypto assets. On September 23, 2024, Judge Ann Marie McIff Allen ruled that the SEC had sufficiently demonstrated that the Green Boxes, combined with the custody agreements, constituted securities. She also found that the defendants created a false impression of investment returns through misrepresentations, ultimately granting the SEC’s requested penalties. At the heart of this scam was a seemingly perfect investment trap: investors paid $3,000 to purchase a mining machine, after which the defendants promised monthly returns of $100—equivalent to annualized returns of 40%–100%. However, the reality was far less rosy: Green United did not use the mining machines for actual mining operations. Instead, they simulated returns by purchasing unminted "GREEN" tokens, which eventually became worthless due to lack of secondary market liquidity.
Green United's business model was highly deceptive: while masquerading as hardware sales, it deeply bound investors through custody agreements. Under these agreements, Green United claimed it would “do all the work” necessary to achieve the promised returns. This model of “promise + control” became the central point of legal contention. In September 2024, U.S. District Judge Ann Marie McIff Allen for the District of Utah ruled that the combination of mining machine sales and custody agreements constituted a securities transaction, satisfying the definition of an investment contract established in the 1946 Supreme Court case SEC v. W.J. Howey Co. This ruling not only rejected the defendants’ argument that no securities transaction had occurred but also explicitly brought cryptocurrency mining machines within the scope of securities regulation.
2. Key Legal Issues: Why Was the Mining Machine Sale Deemed a Security?
2.1 Challenges in Applying the Howey Test
The U.S. Supreme Court in Howey established a four-part test for determining whether something qualifies as an investment contract: (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profits, (4) derived from the efforts of others. Green United’s primary defense was that the mining machines were merely “consumer goods for end-user use,” arguing that the return promises in the custody agreements amounted to commercial incentives rather than securities offerings, and that no “common enterprise” existed as required for a security. However, in this case, Judge Allen broke from conventional interpretations by applying a substance-over-form analysis. She determined that the link between control and profit sources went beyond ordinary product sales. Specifically, she concluded that the returns promised under the custody agreement possessed the characteristics of investment income, thereby bringing the mining machine transaction within the ambit of a “common enterprise.” Her detailed findings were as follows:
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Investment of Money: Investors paid $3,000 to purchase the mining machine, satisfying the first prong;
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Common Enterprise: Investor returns did not stem from the mining machine’s inherent mining capabilities, but instead depended on Green United’s control and operation of the system, establishing a shared economic interest between investors and promoters;
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Expectation of Profit: The promised returns of 40%–100% vastly exceeded normal business investment yields, clearly indicating an expectation of profit;
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Efforts of Others: Green United promised to “do all the work,” requiring no operational involvement from investors, making profits entirely dependent on the promoter’s efforts.
2.2 Divergent Views Among Legal Experts
Despite the court’s final ruling, significant disagreement persists within the legal community. Some commentators argue this was a case-specific fraud. For instance, Ishmael Green, a partner at Diaz Reus, noted that the SEC’s allegations targeted Green United’s misrepresentations and the structure of its custody agreements—not the sale of mining machines per se. As long as mining machines are sold strictly as “end-user-use products,” they may still avoid classification as securities. More importantly, the ruling has sparked intense debate among crypto industry practitioners and legal scholars over the applicability of the Howey test. Supporters argue that the decision reflects the core principle of Howey—substance over form. Although the mining machine is a physical product, the promoter’s absolute control over the system and its strong correlation with profit generation constitute the substantive characteristics of a “common enterprise.” Critics warn, however, that if this logic prevails, any hardware sale accompanied by profit-sharing promises—such as companies offering revenue-sharing clauses when selling equipment—could potentially be classified as a security, leading to unclear legal boundaries. This divide underscores a deeper challenge in regulating crypto assets: how to balance investor protection with technological innovation. Going forward, judicial precedents must further clarify standards—for example, specifying that when goods are sold with profit promises, the arrangement should meet conditions such as “decentralized operation” (e.g., users can independently operate nodes) and “shared risk” (e.g., investors bear maintenance costs) to exclude securities classification.
2.3 Precedents in Crypto Asset Securities Classification
(1) Ripple Case: The SEC alleged that Ripple’s sale of XRP constituted an unregistered securities offering. Applying the Howey test, the court ruled that institutional sales of XRP met the definition of a security. Specifically, Ripple linked XRP’s value directly to its own development in promotional materials (e.g., claiming that “the adoption of the Ripple protocol as a global payment backbone will significantly increase demand for XRP”). Investors’ purchases constituted capital contributions to a common enterprise, with profit expectations based entirely on Ripple’s team’s technical development and marketing efforts. In contrast, programmatic secondary-market sales lacked explicit profit promises or direct links between buyers and the issuer, and thus were not deemed securities. This case marked the first time a court emphasized the decisive role of transaction context in determining crypto asset classification.
(2) Terraform Case: The court held that UST and LUNA qualified as securities, primarily based on the “profits derived from the efforts of others” criterion. Although UST used an algorithmic stabilization mechanism, Terraform consistently communicated expectations through disclosures (e.g., white paper statements promising “UST will maintain a 1:1 peg to the U.S. dollar”) and public endorsements by founder Do Kwon, leading investors to reasonably expect profits stemming from the Terra team’s efforts. The judge emphasized that decentralization alone does not preclude securities classification—as long as there is promoter-driven marketing and profit promises, even fully automated transactions via smart contracts may fall under regulatory scrutiny.
3. The Future of Crypto Asset Securities Classification
By using custody agreements to transform mining machine returns into financialized payoffs, Green United effectively turned investors into participants in a promoter-dependent “common enterprise,” rather than purchasers of mere hardware. In the short term, this case serves as a deterrent against fraudulent packaging of crypto projects, helping protect investor interests. In the long run, it contributes to the evolution of securities regulation frameworks. As new technologies like crypto assets and smart contracts reshape traditional financial landscapes, mechanically applying the Howey test is no longer sufficient. Regulators must dynamically assess each project’s specific structure, striking a balance between fostering innovation and enforcing compliance. Ultimately, the healthy development of the crypto market depends on a deep dialogue between legal reasoning and technological logic. The future landscape of crypto asset securities classification is gradually unfolding—one case at a time.
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