On August 7, 2018, the Honorable Richard Seeborg, United States District Court Judge for the Northern District of California, issued an order denying Defendants’ motions to dismiss a class action brought by HGT Law to seek rescission on behalf of all investors who participated in the July 2017 Tezos initial coin offering (“ICO”) by contributing digital currencies, such as Bitcoin and Ethereum, in exchange for Tezos “tokens.” The class action asserts claims against Defendants Tezos Stiftung (“Tezos Foundation”), Dynamic Ledgers Solutions, Inc. (“DLS”), and Arthur Breitman and Kathleen Breitman for selling unregistered securities (Tezos tokens), in violation of the Securities Act of 1933 (“Securities Act”).
In denying the motions to dismiss, the Court held that it had specific personal jurisdiction over the Tezos Foundation, which “encouraged U.S. citizens to participate in the ICO,” decided to “build an English-language, U.S.-hosted website,” and structured an “ICO accommodating U.S.-based participation.”
The Court also rejected the Tezos Foundation’s argument that the forum selection clause contained in certain, purported “Contribution Terms” required dismissal of the class action in favor of the courts of Switzerland. The Court held that the complaint sufficiently alleged that the forum selection clause of the Contribution Terms is not binding, because the ICO process did not provide links to the Contribution Terms themselves or any other indicia validating the purported terms.
The Court also rejected the Tezos Foundation’s argument that the purchases of Tezos tokens occurred extraterritorially, beyond the reach of the Securities Act. The Court explained that, “[t]ry as the Foundation might to argue that all critical aspects of the sale occurred outside of the United States, the realities of the transaction … belie this conclusion.” Here, numerous investors participated in the ICO from the United States through an interactive website that was hosted on a server in Arizona and run primarily by Arthur Breitman in California. Further, the marketing for the ICO almost exclusively targeted United States residents. Additionally, the contributions made by investors became “irrevocable” once they were validated by a network of blockchain nodes clustered more densely in the United States than in any other country. The Court held that these factors together support the inference that the purchases of Tezos tokens occurred within the United States.
Lastly, the Court held that DLS and the Breitmans were more than mere “collateral participants” in the ICO, and therefore faced liability as “sellers” under Section 12(a)(1) of the Securities Act. The court explained that DLS “effectively discredit[ed] any notion of DLS as a bit player” by framing DLS’s involvement – “including creation of the Tezos technology, establishment of a legal entity to monetize DLS’ interest in that technology, development of a platform to facilitate said monetization, and minute-to-minute oversight of the monetization process itself – as rising well above the level of ‘collateral participation’ in [the] ICO transactions.”
A copy of the Judge Seeborg’s order can be found here.
Information about the consolidated class action complaint filed by HGT Law can be found here.
For more information on the Tezos ICO class action, please contact us at (646) 453-7288 or via email at email@example.com.