Even after the precipitous drop this past Friday in the price of Bitcoin and other digital currencies, the developments during the past several months involving cryptocurrencies have to be one of the year’s top business stories. While news articles about digital currencies focus on the dramatic rise this year in the price of Bitcoin or on the recent wave of initial coin offerings (ICOs), part of this year’s cryptocurrency story has to include the SEC’s increasingly active approach to policing digital currency trading, as well as the rising numbers of lawsuits filed against cryptocurrency sponsors. As I have noted in prior posts, in recent weeks claimants have filed a number of cryptocurrency-related securities lawsuits. Late last week, investors filed two more of these lawsuits, one involving an ICO company and the other involving a publicly traded blockchain consulting company.
The ATBCOIN Lawsuit
On December 21, 2017, a plaintiff investor filed a securities class action lawsuit in the Southern District of New York against ATBCOIN LLC and its two co-founders. A copy of the plaintiff’s complaint can be found here. Between June 12, 2017 and September 15, 2017 ATB conducted an ICO in which investors paid a total of over $20 million worth of digital currencies in exchange for ATB Coins. The prices investors paid for the ATB Coins ranged during the course of the offering from $1.00 to $2.50.
The purpose of the ICO was to raise funds to permit ATB to create and launch a new blockchain that would “deliver blazing fast, secure and near-zero cost payments to anyone in the world.” The blockchain that was to launch on September 1, 2017 “would be the fastest blockchain-based cryptographic network in the Milky Way galaxy.” In press releases issued in conjunction with the offering, ATB referred to the ATB coins as “the cryptocurrency of the future.”
The ATB Blockchain actually did launch, although on September 14, rather than on September 1. It is, according the complaint, “hardly the ‘fastest … in the Milky Way galaxy.’” Adoption of the ATB Coin and the ATB Blockchain has “been essentially nonexistent” and the value of the ATB Coins has “continuously fallen.” The complaint alleges that the price of ATB Coin had fallen to 50 cents, well below the offering price.
The complaint alleges that the ATB ICO was an offer and sale of unregistered securities in violation of the federal securities laws. In support of its argument that the ATB Coins are securities, the ATB ICO investors “reasonably expected” that the ATB Coins they received in exchange for their payment of other digital currencies would be worth more than the value of the value of the payments. The complaint also alleges that the defendants referred to the ATB ICO participants as “investors” and repeatedly stressed the profit potential of holding ATB Coins.
The Complaint alleges that the defendants’ sale of unregistered securities violated Section 5 of the Securities Act of 1933 and seeks relief under Section 12 of the Act. The complaint seeks on behalf of the class of persons who purchased ATB Coins in the ICO “compensatory, injunctive, and rescissory relief, which would provide rescission and repayment of all investments unto the ATB ICO, as well as secure and conserve such funds until repayment.”
The Crypto Company Lawsuit
The recent securities lawsuit filed against The Crypto Company is different from the recent lawsuits filed against cryptocurrency companies, because Crypto, by contrast to the other defendant companies, was not involved in an ICO. Rather, Crypto is a publicly traded blockchain consulting company. The company has been in the news after the SEC recently stopped trading in the company’s securities.
In June 2017, Crypto entered in a share purchase transaction with Croe, Inc., in which Crypto became a wholly owned subsidiary of Croe, a publicly traded fitness apparel company. In October 2017, Croe changed its name to The Crypto Company. Crypto claims to be in the business of providing consulting services regarding blockchain technology and trading in digital assets.
In a securities class action lawsuit filed on December 21, 2017 in the Central District of California, a Crypto shareholder alleges that the company’s share price surged more than 17,000% in less than 3 months, including a 2,500% increase just in the period between December 4, 2017 and December 18, 2017. The company’s market capitalization reached nearly $12 billion. A copy of the plaintiff’s complaint can be found here.
As detailed in a December 22, 2017 Motley Fool article about Crypto, the way the company’s share price reached these lofty levels is very interesting. Even though the company has over 20 million shares outstanding, trading volume shows that fewer than 33,000 shares traded over a five-day period to move the company’s share price from $22 to as high as $642. As the article notes, “0.0016% of outstanding shares traded moved this stock 2,800% higher in just five days’ time.” This trading activity did not go unnoticed by the SEC.
On December 19, 2017, the SEC issued a temporary suspension of trading in Crypto’s shares. The suspension will expire at midnight on January 3, 2018. The SEC said it was concerned about “the accuracy and adequacy of information” relating to compensation paid for promotion of the company and statements in the company’s SEC filings about the plans insiders to sell its shares in the company’s common stock. The SEC also said that “Questions have also arisen concerning manipulative transactions in the company’s stock in November 2017.”
The Motley Fool article notes that the last time that the SEC intervened to halt trading in a “blazing-hot cryptocurrency stock,” the share price of the company involved declined 70% when the trading resumed.
In her securities lawsuit complaint, the plaintiff alleges that the defendants made false or misleading statements or failed to disclose that “(i) Crypto unlawfully engaged in a scheme to promote and manipulate the Company’s stock; and (ii) as a result, Crypto’s public statements were materially false and misleading at all relevant times.”
The recent surge in cryptocurrency-related lawsuits has all the earmarks of quickly becoming a litigation wave, as several lawsuits relating to digital asset trading have been filed just in the last few days — three filed just last week alone.
By my count, there have been a total of four ICO-related securities class action lawsuit filed in the last few weeks, along with the separate Crypto Company cryptocurrency-related lawsuit. For the record, the four ICO-related lawsuits involved Tezos (about which refer here), Centra Tech (here), Monkey Capital (here), and ATBCOIN.
Taken collectively, the lawsuits give the definite impression the skyrocketing prices of Bitcoin and other cryptocurrencies have attracted a lot of questionable activity. The questionable activity has in turn in many cases led to litigation. Even the downturn on Friday in the price of Bitcoin and other cryptocurrencies could generate further litigation – as the ATB lawsuit above shows, investors who lose money on their investment may be motivated to pursue their litigation alternatives.
It is interesting that many of the ICO-related lawsuits involve allegations that the coin or token sale represented an unregistered securities offering. Whether or not the claimants in these cases will prevail on this theory, it is hard to avoid the sense that the claimants asserting these claims may not be the most sympathetic. The ICO investors obviously knew they coins or tokens they were buying were not registered securities yet nevertheless they invested in the offering. They did so because they were willing to invest in a highly speculative transaction in the hopes of profiting.
The securities laws of course exist to protect investors, but the “Buyer Beware” nature of these transactions does suggest the investors participated in these transactions despite the apparent dangers. Investors who invest on promises such as the claim that a company’s blockchain is the fastest in the Milky Way are buying into the hype. They are buying precisely because of the hype.
The fact that the SEC has made it clear that many of these transactions involve securities that must be registered with the SEC, and the fact that disappointed investors have made it clear that they indeed to sue ICO sponsors that fail to register the coins or token, eventually will cause companies seeking to complete an ICO to comply with the registration requirements (or maybe eventually will put an end to ICOs altogether). All of which suggests that the current wave of ICO-related lawsuits, eventually will come to an end (at least to the extent the lawsuits are based on the alleged failure to register the offering with the SEC).
For now at least, signs are that cryptocurrency related litigation will be one of the early litigation filing trends in the New Year. The sudden surge at year end of these kinds of lawsuits in all likelihood will continue. Indeed, if the slide in the price of Bitcoin and other cryptocurrencies continues, there are likely to be even more disappointed investors considering their litigation alternatives.