3 Takeaways From the Ruling Keeping the Tezos ICO Suit Alive and Stateside
Although U.S. District Judge Richard Seeborg's ruling was far from the final word on whether the Tezos initial coin offering ran afoul of U.S. securities laws, it did offer the judge's early look at some critical issues in the case.
August 10, 2018 at 04:13 PM
5 minute read
A federal judge in San Francisco this week let the majority of the claims survive in a proposed securities class action against the organizers of the Tezos initial coin offering.
Although U.S. District Judge Richard Seeborg's 19-page ruling issued Tuesday was far from the final word on whether the Tezos ICO ran afoul of U.S. securities laws, he let one defendant—Bitcoin Suisse AG, which provided intermediary services from some foreign investors in the ICO—out of the lawsuit altogether.
Yet it's also worth noting that the order offered a look at the judge's early thinking on some critical issues in the case and others like it. Here are three things that nascent cryptocurrency companies, or frankly anyone selling goods and services cross-borders online, should pay attention to in Seeborg's ruling.
1. If you want to set up a Swiss Foundation to avoid U.S. jurisdiction, don't aim the lion's share of your marketing efforts at the U.S.
The corporate structures behind the Tezos ICO are so clever that it can be a little hard keeping all these defendants straight. First, you have Arthur and Kathleen Breitman, the husband-and-wife team behind Tezos, and their California-based company Dynamic Ledger Solutions, which is developing the underlying blockchain technology. Then you have the Tezos Foundation, the purportedly independent Swiss Foundation set up to oversee the ICO which is set to acquire DLS and take responsibility for its future development once everything is up and running.
Seeborg summed the deal up this way: “While DLS shareholders, as a part of this handoff, stood to receive 8.5% of all funds raised and 10% of all tokens created, the takeaway for individual contributors was less concrete. Rather than adopting a direct tokens-for-capital system, the Foundation would reward donators by 'recommending' (to the decentralized Tezos user network) they be awarded a commensurate token allocation. This flexibility was asymmetric. Contributors, who were to give in either Bitcoin or Ethereum, could not retract donations once recorded on the blockchain ledger.”
Contributors (not “investors” in the parlance of Tezos, mind you) handed over bitcoin and ethereum valued at $232 million last summer. That cryptocurrency ballooned in value to more than $1 billion by last December and is now valued at $700 million, according to Seeborg's order.
The Tezos Foundation and its lawyers at Davis Polk & Wardwell argued that it couldn't be held subject to the court's jurisdiction just because the tezos.com website is interactive, freely accessible in the U.S. and hosted on a server in Arizona. But the judge found that the plaintiff had also alleged that the Breitmans were the “de facto U.S. marketing arm” of the foundation, that the foundation had done “little to no marketing” elsewhere, and that a large chunk of the 30,000 contributors were in the U.S.
2. Make sure any language that you want binding on ICO contributors is within the stream of the online transaction.
Although the Tezos ICO “Contribution Terms” clearly stated that all Tezos-related litigation is subject to Swiss law and would be “exclusively and finally settled in the courts of Zug, Switzerland,” Seeborg found that the lawsuit alleges that there's a chance that a “reasonably prudent user” wouldn't have suspected that. The lead plaintiff, former Perkins Coie associate Arman Anvari, alleges he was quickly redirected from www.tezos.com, where the choice of law and forum selection clauses were buried on the 10th page of a 20-page document.
“Bereft of hyperlinks to the contract itself, language indicating the user's purported agreement, or other indicia tending to validate a 'browsewrap' agreement, Anvari's account does not facially indicate his having been put on inquiry notice,” Seeborg wrote.
But the judge noted that Anvari hadn't said whether he actually read the contribution terms and his lawyers at the hearing on the defense motions to dismiss didn't know one way or the other if he had. If Anvari read the agreement and was aware of its terms, the judge wrote that getting past the defense motion to dismiss “may ultimately prove to be fleeting procedural mercy.”
3. Where does the money change hands in these deals anyway?
Toward the bottom of Tuesday's order, Seeborg addressed what reads like a legal riddle: “where does an unregistered security, purchased on the internet, and recorded 'on the blockchain,' actually take place?”
His conclusion, for now at least, is that the plaintiff gave him enough to say that the purchase took place in the United States. The interactive website was hosted on a server in Arizona and primarily run by Arthur Breitman in California. The plaintiff presumably learned about the ICO from marketing aimed at the U.S. And his contributions of ethereum to the ICO “became irrevocable” after it was validated by a global network of “nodes,” which are most densely clustered in the U.S.
“While no single one of these factors is dispositive to the analysis, together they support an inference that Anvari's alleged securities purchase occurred inside the United States,” Seeborg wrote.
Whether all these conclusions stand up after further discovery in the case would seem to be Seeborg's next riddle.
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