The Restis Law Firm is on the Lead Counsel team in In re Tezos Securities Litigation, currently pending in the United States District Court for the Northern District of California. Case No. 3:17-cv-06779.
In re Tezos is a securities class action on behalf of investors in the Tezos “Initial Coin Offering” or “ICO.” An ICO is a fundraising mechanism similar to an initial public offering. In an ICO however, founders of a blockchain project sell crypto-tokens instead of stock. The Tezos founders conducted their ICO in July 2017, and raised $232 million in bitcoin and ether. At the time, the Tezos ICO was the largest in history.
Federal securities laws generally require any security that is offered or sold in the U.S. to be registered with the Securities and Exchange Commission. These laws are designed to protect the public by requiring various disclosures to help investors understand their investment.
Depending on the circumstances, the sale of crypto-tokens in an ICO can constitute a security. According to the SEC, “issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies.”
According to the lawsuit, the Tezos founders attempted to avoid the reach of the U.S. securities laws by characterizing investments in the ICO as “contributions,” or “donations.” But the Complaint alleges the Tezos ICO had all the hallmarks of a securities offering and was required to be registered with the SEC.
If the lawsuit is successful, investors will be entitled to unwind their investment in the Tezos ICO, and get back invested bitcoin and ether. Investors would also be entitled to damages if they sold their Tezos (XTZ) tokens at a loss.
On August 7, 2018, the Honorable Richard Seeborg denied defendants’ motion to dismiss the case. The Court rejected Defendants’ argument that it does not have jurisdiction over defendants and the ICO proceeds located in Switzerland. The Court also rejected the Defendants’ argument that the case must be litigated there.
Substantively, Judge Seeborg concluded that the U.S. securities laws could be applied to the ICO because it constituted a “domestic transaction.” The Court also concluded that Defendants could be held liable as “sellers” of the Tezos tokens. Conspicuously absent from the Court’s analysis was whether the Tezos ICO was an illegal offer and sale of securities. But the Court did not consider this issue because Defendants did not raise it.