This week's U.S. Supreme Court decision in Cyan v. Beaver County Employees Retirement Fund could have a major impact on how and where we see class action securities claims brought against issuers of new cryptocurrencies.

By way of background, not even Satoshi Nakamoto, the pseudonymous developer credited with creating Bitcoin, could have predicted that the first truly transformative use of his innovative blockchain technology would be to disintermediate venture fundraising through the sale of proprietary virtual tokens. Unfortunately for the issuers of the more than 1,500 cryptocurrencies or tokens that have already been issued — many of which were promoted to inexperienced and unaccredited investors as nonsecurity “utility tokens” — the Securities and Exchange Commission has taken an increasingly hostile view of token sales. SEC head Jay Clayton has gone so far as stating that he has not seen a token sale that he does not consider the sale of securities.

The burgeoning crypto bar has been anticipating a wave of litigation around token sales instigated by the regulatory uncertainty over whether a token issuance necessarily constitutes the sale of a security, as well as by bad actors attracted to the space by the possibility of raising millions of dollars from an exuberant market that has not demanded the issuer first demonstrate that its technology is not mere vapor or that its claims are true. Thus far, however, there have only been a handful of class actions filed nationwide. As of the date of this publication, all of the class cases have been filed in federal court.

This week's Cyan decision provides a road map for plaintiffs to file federal class claims against token issuers (as well as noncrypto-related securities issuers) in state court jurisdictions that are friendlier to class claims. In Cyan, a group of shareholders initiated a class action in California state court against telecommunication company Cyan Inc. alleging that its IPO was misleading under federal securities law. Cyan moved for judgment on the pleadings, alleging the state court lacked subject matter jurisdiction because the Securities Litigation Uniform Standards Act of 1998 divested state courts of concurrent jurisdiction to hear claims brought under the 1933 Securities Act. Cyan's motion was denied. The company then lost before the California Court of Appeal and was denied further review by the California Supreme Court. The U.S. Supreme Court granted certiorari to settle the question of whether state courts retained concurrent jurisdiction under the 1933 Securities Act, a question that had been interpreted differently by district courts throughout the country.

The Cyan plaintiffs' claim arose entirely under the 1933 Securities Act, which Congress enacted during the Great Depression as a mechanism for protecting investors from misleading or fraudulent investment claims. The 1933 act provides a private cause of action to defrauded or misled investors. By the statutory plain text, the claims could be brought in state or federal courts. However, the law contains a unique provision that prevents removal of certain class action claims to federal court. The act (which is exempt from the 2005 Class Action Fairness Act and its grant of federal jurisdiction to class action claims seeking aggregate damages of $5 million or more) takes a fundamentally different remedial approach than other federal securities laws, including the 1934 Securities Act, which grants federal courts the exclusive right to enforce regulations on the sale of existing securities.

Cyan argued that by enacting SLUSA in the 1990s (itself a response to an increase in state class action securities claims unintentionally caused by the passage of Private Securities Law Reform Act), Congress intended to divest state courts of jurisdiction to hear securities class action claims. The U.S. solicitor general advocated for a middle approach that preserved concurrent jurisdiction but gave a defendant the right to remove the case to federal court.

In an opinion authored by Justice Elena Kagan, a unanimous court rejected Cyan's argument and held that a plain language reading of SLUSA demonstrates that Congress intended to only divest state courts of jurisdiction with regard to state law claims. The court's decision creates a pathway by which plaintiffs are now able to bring federal securities claims under the '33 act in state court as long as the they do not allege additional federal or state law claims which, if added, would allow the defense to remove the case to federal court.

The court's decision allows plaintiffs to venue shop between state and federal courts in order to seek out a jurisdiction that they perceive to be friendlier to class claims or that offer more lenient pleading or discovery standards than available in federal court. The decision could also have a major impact on the development of securities case law as applied to the issuance of cryptocurrencies, especially considering nearly every issue in the space is an issue of first impression, which could further incentivize venue shopping by class plaintiffs.

Ultimately, it is now up to Congress to determine whether to amend SLUSA and the 1933 act to divest state courts concurrent jurisdiction over large federal securities class actions. Until that time, we may see some state courts emerge as the preferred venue for federal securities class claims against token issuers.

Justin Wales is the chair of Carlton Fields' blockchain and virtual currency practice. Contact him at [email protected]