HGT Law Defeats Demurrer in FEI/TRIBE Tokens Securities Class Action
On September 16, 2022, the Superior Court of California, County of San Francisco, issued an order overruling Defendants’ demurrer (i.e., upholding the claims) in the class action commenced by HGT Law seeking rescission on behalf of all investors who invested in the offering of FEI/TRIBE digital tokens between 12:01 PM on March 31, 2021 and 12:01 PM on April 3, 2021, Pacific Standard Time (the “Offering”). In the class action, HGT Law is seeking rescission on behalf of all investors who invested ETH in exchange for FEI/TRIBE digital tokens. The central allegation in the class action is that Defendants Fei Labs Inc., Joseph Santoro, Briana Montgomery and Sebastian Delgado sold unregistered securities in violation of the Securities Act of 1933 (“Securities Act”).
In upholding the claims asserted in the class action, the Court rejected Defendants’ argument that the Offering occurred extraterritorially, beyond the reach of the Securities Act. Defendants had argued that the Offering was conducted over a global distribution network consisting of blockchains residing worldwide and, thus, could not constitute a domestic U.S. transaction unless all the nodes involved in the transactions were located in the United States. The Court rejected this argument, explaining that, “if Defendants’ extreme approach were to be accepted, it would be possible that no country’s securities laws would apply to a cryptocurrency transaction which utilizes worldwide computer networks.” Additionally, the Court explained that Defendants’ position “is irreconcilable” with the SEC’s guidance that “[a]ll securities offered and sold in the United States must be registered with the Commission or must qualify for an exemption from the registration requirements” and that “[t]he automation of certain functions through [blockchain] technology, ‘smart contracts,’ or computer code, does not remove conduct from the purview of the U.S. federal securities laws.”
The Court also rejected Defendants’ argument that they were not liable because they were not the persons who actually sold the FEI/TRIBE tokens (i.e., the statutory sellers) under the Securities Act. Defendants had argued that in the Offering, the counterparty with whom investors interacted was the self-executing “smart contract” or protocol that Defendants implemented, and not any of Defendants themselves. Dismissing such an argument as “risible,” the Court explained that, “[s]oftware, no matter how complex, does not ‘offer’ or ‘sell’ securities; people (and the corporations and other business organizations they form) do, utilizing software as the means by which those transactions are effected.” Here, Defendants conceived and founded the software, conducted the Offering, issued the FEI and TRIBE tokens and had a direct financial interest in the Offering. Accordingly, the Court held that Defendants “readily qualify as statutory sellers.”
In upholding the claims of FEI/TRIBE investors, the Court also relied on the prior decision of then Judge Seeborg in In re Tezos Securities Litigation, 2018 U.S. Dist. LEXIS 157247, 2018 WL 4293341 (N.D. Cal. Aug. 7, 2018), also litigated by HGT Law. In that class action, HGT Law brought claims for rescission on behalf of investors who invested in the Tezos digital token. That class action was settled on August 28, 2020 (more information on the Tezos settlement can be found here).
A copy of the Court’s order in the FEI/TRIBE class action can be found here.
A copy of the FEI/TRIBE class action complaint filed by HGT Law can be found here.
For more information on the FEI/TRIBE class action, please contact us at (646) 453-7288 or via email at info@hgtlaw.com.