US Court accepts class action against Swiss-based TEZOS foundation and its people after post-ICO turmoil. This is a signal that dozens if not hundreds of high-profile ICOs might be held accountable despite and their legal model might not hold. This might be the final blow to the Zug Non-for-profit Stiftungs-ICO model.
Forum Conveniens for US Investors
- Question: Does setting up a Swiss Foundation for a Token Sale immunize issuers against US jurisdiction?
- Answer: the US District Court of North Carolina just answered “NO” in its Order of Defendants´ Motion to Dismiss dated August 7th, 2018.
The TEZOS people and partners sought to dismiss a class action against them filed with the US Court. The Court denied the motions of the founders people which means that for now, the claim against them before this US Court is “on” despite the fact the TEZOS is a Swiss Organization. Except for Swiss Bitcoin, the Court claims jurisdiction over the defendants. Furthermore, the Court granted the Motion of Tim Draper, an early TEZOS investor but with leave to amend. Draper seems to have a fair chance to escape the class action.
This Order of Defendants`Motion to Dismiss will likely constitute a basic research material for quite a few litigation lawyers out there. So please find the link to the full document here.
In July 2017, the Tezos blockchain project (“Tezos”) conducted an Initial Coin Offering (ICO).A US plaintiff invested 250 ETH in the TEZOS ICO and now claims to be a victim of an unregistered securities sale and seeks rescission and damages for a group of US-based ICO contributors from Arthur Breitman, Kathleen Breitman, and their company Dynamic Ledger Solutions, Tim Draper, a substantial pre-sale investor in Tezos, the Swiss Tezos Foundation, and Bitcoin Suisse AG, a Swiss service provider, for the sale of unregistered securities. All defendants sought to dismiss the claims against them for statutory and jurisdictional arguments. The Court denied the arguments for DLS and for the TEZOS foundation.
Since 2016 and especially after the successful Token Sale of the Ethereum foundation in Zug, the Swiss foundation model with its quite interesting donation approach was marketed as the HOLY GRAIL for Token Sales by Swiss lawyers. The Swiss foundation model was praised for its avoidance of any Token regulatory requirements and also for its avoidance of taxes!
The Court has not yet made a judgment on the qualification of the tokens but evidently has a quite straight-forward stance by describing the donation model as follows:
Rather than adopting a direct tokens-for-capital system, the Foundation is to 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.
We will have to wait for the future judgment of this approach but we guess in near future a lot of people will just wonder about the stupidity how such obscure regulatory and taxation models have ever been legally supported.
Control Matters, Beats Location (Substance over Form)
By now the Court has made a judgment on the applicable jurisdiction for the class action claim questioned mainly by the TEZOS Foundation with the Foundation arguing that all critical aspects of the sale occurred outside of the United States.
The Court found the realities of the transaction by noting that
- the web domains as well as the English-language websites of the TEZOS foundation were registered with a US server and were controlled by US people,
- most of the ICO marketing was done by related US persons (the people who created the foundation and are to be qualified as the marketing arm of the Foundation in the US)
- a large portion of the contributions was allegedly made in the US.
The court judged that the Claimant participated in the transaction from the US. He did so by using an interactive website that was: (a) hosted on a server in Arizona and; (b) run primarily by Arthur Breitman in California. He presumably learned about the ICO and participated in response to marketing that almost exclusively targeted United States residents. Finally, his contribution of Ethereum to the ICO became irrevocable only after it was validated by a network of global “nodes” clustered more densely in the United States than in any other country.
Regarding the forum-selection clause (determining that all contributors to the Tezos Token Sale agreed to Europe as the legal situs of all ICO-related litigation) within the ”Contribution Terms” drafted by the Foundation, the Court found that this clause to be not effective as qualifying as a“Browsewrap agreement”.
“Browsewrap” agreements refer to terms and conditions by which a website attempts to bind its users by enforcing affirmative assent. Such agreements are most readily distinguished by comparison to their “clickwrap” counterparts, which ask users specifically to engage with the website — generally by checking a box — in a show of contractual consent. “Where . . . there is no evidence that [a] website user had actual knowledge of the agreement, the validity of the browsewrap agreement turns on whether the website puts a reasonably prudent user on inquiry notice of the terms of the contract.”
The jurisdiction motion by Bitcoin Suisse, a TEZOS’ partner in the ICO was – unsurprisingly – granted. The US court says it has no jurisdiction over this Swiss-based service provider.
The Promoters’ Responsibility
- Question: do high-profile investors and contributors have liabilities?
- Answer: yes, if a direct connection with investment is established
Timothy Draper resp. one of its venture capital vehicles has been an investor in DLS already since 2016. His involvement with Tezos was marketed prior to and during the Tezos Token Sale. Around the same time as Draper’s public alignment with TEZOS, the project’s fundraising efforts started to gather steam.
Regarding his potential liability the Court argued as follows:
Section 12(a)(1) of the Exchange Act prohibits the offer or sale of any unregistered security in interstate commerce. 15 U.S.C. § 77l(a)(1). Under the Supreme Court’s decision in Pinter v. Dahl, Section 12(a)(1) liability “is not limited to persons who pass title” in an unregistered security, but also extends to “the person who successfully solicits the purchase” of such security, “motivated at least in part by a desire to serve his own financial interests or those of the security owner.” Pinter v. Dahl, 486 U.S. 622, 643-647 (1988).
As no direct relationship between the purchasing decision of the damaged investors and Timothy Draper took place and as the damaged investors have not yet made averments that they were cognizant of, or influenced by, Draper’s involvement in the Tezos project, the motion by Draper was granted with leave to amend. In our view, the Court, however, principally agreed on the liability of promotors and high-profile investors.
Hence, the “Draper” part of the court order may set a standard for future claims. It should be of special interest for a lot of ICO-advisors and #Fake News media companies our there.
For the moment evidently the notorious ICO skeptic lawyer Preston Byrne is right:
As I’ve said many times: investors will do very well out of ICOs. Developers will do very poorly. https://t.co/zfltD4oXEN
— Preston Byrne (@prestonjbyrne) August 8, 2018
So crap some popcorn and let´s watch.