ICOs and Token Offerings Face First Class Action Challenges


SEC

 

Digital assets may be hot, but a new class action lawsuit reveals growing concerns from investors and buyers about the risks of cryptocurrencies, tokens and coins. 

In July, the Tezos project made history by becoming the highest raising token offering ever at the time, pulling in over $230 million in funds that its founders said would be used to develop the new technology. 

But a Nov. 13 class action case alleges that the group of entities developing Tezos’ Tezzies tokens tried to evade U.S. securities laws.

The complaint against Tezos, and a similar suit filed Oct. 25, are the first examples of private litigation filed against a token offering or ICO in the U.S., according to Bloomberg Law data. But they very likely won’t be the last, fintech attorneys told Bloomberg Law.

Token offerings, often called initial coin offerings, or ICOs, have grown popular in recent months. Similar to initial public offerings or crowdfunding models, they’ve allowed tech startups to more quickly and easily raise capital by selling digital coins or tokens to individual buyers or investors, who then trade the coins for other currencies or services or expect their value to rise.

The Tezos project had promised to improve upon the popular technology underlying other digital assets platforms, like Bitcoin and Ethereum.

But the complaint says Tezos defendants said they were raising donations in exchange for tokens, when the tokens were actually securities instruments that have since fallen in value. Now, there’s doubt as to whether Tezzies will ever launch, the complaint says.

Decisions in the Tezos cases, which attorneys say are at the beginning of an expected wave of private lawsuits against token offerings, may provide some clarity as to how other tokens and coins should be classified. The U.S. Securities and Exchange Commission has not weighed in on if Tezzies tokens are classified as securities. 

The latest case was brought in the U.S. District Court Middle District of Florida by David Silver, a co-founder at SilverMiller law firm. The earlier one was filed with the Superior Court of California County of San Francisco by James Taylor-Copeland, founder of Taylor-Copeland Law. 

The Tezos project founders, Kathleen and Arthur Breitman, did not immediately respond to a request for comment. The Breitmans have publically defended the progress of the project, its structure and its integrity in a recent blog post.