In the latest of what is beginning to look like a wave of ICO-related securities lawsuit filings, would-be investors who made pre-offering investments in Monkey Capital’s promised but uncompleted ICO have filed a securities class action lawsuit in the Southern District of Florida against the company and its principals, alleging that the company’s pre-offering sale of options to purchase coins or tokens in the offering represented the sale unregistered securities in violation of the federal securities laws. A copy of the plaintiffs’ December 19, 2017 complaint can be found here.



In order to finance a planned decentralized cryptocurrency hedge fund and private cryptocurrency exchange, Monkey Capital proposed to complete an initial coin offering. The key component of its proposed business plan was the company development of a trading platform it called Monkey Capital Market.


The company originally proposed that its ICO would take place in July 2017. As part of its promotion of the planned ICO, the company offered pre-offering investors newly-created cryptocurrency options called Coeval, which upon completion of the ICO would permit the pre-offering investors to exchange the option for a to-be-created cryptocurrency called Monkey Coin. The pre-offering options purportedly allowed investors to invest in Monkey Capital “at a valuation premium” before the ICO and to “get in on the ground floor.”


According to the complaint, investors were solicited to transfer cryptocurrency to Monkey Capital in exchange for the Coeval options. The complaint alleges that defendants represented that Money Coin “would skyrocket in demand and value once the Monkey Capital Market was launched.” The complaint alleges that in the lead up to the offering, the defendants promoted the ICO not only on the company’s website and offering white paper, but also in social networking posts and other media communications.


The complaint alleges that the proposed July 2017 offering was postponed until August 8, 2017, allegedly to allow “major institutional partners” more time to align investment interests. The delayed offering date came and went without the ICO commencing. Instead, the complaint alleges, at or about that time, Monkey Capital’s fundraising website “disappeared.” There had been no offering and Monkey Capital Market has not been developed.


The complaint alleges further that the defendants themselves have transferred all of their own holdings in the Coeval options for other cryptocurrencies or fiat currencies, causing a “precipitous drop” in the value of the options, which now “have no marketability.”


Instead of completing the offering, the complaint alleges, just before the postponed offering date, Monkey Capital transferred to the company’s founder and owner, Danial Harrison, and other defendants, one billion in Monkey Coins. Harrison alone is alleged to have received 800 million of the coins, who, the complaint alleges “quickly converted them into other cryptocurrency and fiat currency – a combination present believed to be valued at approximately $30 million.”


The Plaintiffs’ Complaint

The complaint was filed on behalf of five investors who collectively invested cryptocurrencies worth over $3 million in the Coeveal pre-offering options. Their complaint purports be filed on behalf of a class of persons who transferred cryptocurrencies to or for the benefit of Monkey Capital between June 1, 2017 and October 31, 2017 and in furtherance of Monkey Capital’s ICO. The complaint alleges that the class members together contributed cryptocurrencies at the time worth over $5 million, now valued at over than $15 million due to the rising cryptocurrency values.


The complaint alleges that the pre-offering Coeval options represented “securities” as they had no pre-launch utility and were entirely dependent on the efforts of the issuer to successfully develop and launch a functional network, and the investors expected that they would receive profits from the investments in the defendants’ efforts.


The complaint alleges that the in offering unregistered securities, the defendants violated Section 5 of the Securities Act of 1933, as well as the equivalent provisions of the Florida securities laws. The complaint also alleges that in their offer for sale and promotion of the securities, the defendants violated the anti-fraud provisions of Section 17 of the Securities Act of 1933 and the equivalent provisions of the Florida securities laws. The complaint also asserts claims for rescission of contract and alter ego liability. The complaint seeks compensatory and equitable relief rescinding their investments in Monkey Capital and “restoring to them the assets and funds they were fraudulently induced into investing.”



The plaintiffs have only just filed their complaint and it is far too early to conjecture about how their lawsuit will fare. The allegations in the complaint are unproven. However, the complaint’s allegations do create a rather alarming impression, the disturbing nature of which is even further reinforced by the allegations the SEC has raised in its various enforcement actions to date and the allegations in the other ICO-related securities lawsuits that have been filed.


Notwithstanding the problems that have come to light, interest in ICOs and cryptocurrencies generally continues to surge, and probably will continue to do so as long as the soaring valuations of Bitcoin and other cryptocurrencies continue to dominate the headlines in the business pages. Eventually and inevitably, the soaring valuations will come back down to earth, undoubtedly leaving behind a host of disappointed (and possibly angry) investors.


The one thing that the string of recent ICO-related securities lawsuit filings does show is that disappointed ICO investors are willing to pursue litigation claims against ICO sponsors and to rely on the federal securities laws as the basis of their claims.  (Please refer here and here with respect to the previously filed ICO-related securities suits involving, respective, Tezos and Centra Tech.)


There is no doubt that ICOs have caught the attention of the plaintiffs’ bar. Should there be (as I fully expect will happen at some point) a significant downturn in cryptocurrency valuations, there would appear to be the possibility of even more cryptocurrency-related securities litigation. In any event, I would not be surprised if we were to see a lot more ICO and cryptocurrency related lawsuits in the months ahead.


ICOs and Insurance: As pointed out in a December 15, 2017 memo from the Hunton & Williams law firm entitled “Initial Coin Offerings and Insurance” (here), the exposure ICO companies face from investors and governmental agencies are of the type that “traditionally would be covered by D&O insurance.” However, the market for D&O insurance for ICOs is “extremely limited,” although there are signals in the marketplace that could be interpreted to suggest that insurers “may not want to abandon opportunities in this new market prematurely.”


Even assuming D&O coverage were available, there are a number of issues that would need to be addressed. Among other things, the continuing question of whether the offered tokens or securities represent “securities” could also raise potential coverage issues under the typical private company D&O insurance policy. The typical private company policy contains exclusions for public offerings of securities, so, the memo suggests, ICO companies “will have to look to public company D&O forms, which offer coverage for securities claims but are generally harder to place and may be subject to more stringent exclusions and underwriting requirements.”


D&O insurance policies also generally contain conduct exclusions precluding coverage for fraudulent misconduct and intentional violations of the law. As the memo notes (and as the allegations in the various ICO-related securities suits suggest), “ICOs have gotten a reputation for operating on the fringe of legality.” Allegations of fraudulent misconduct potentially could trigger exclusions under the D&O policies.


The SEC’s pronouncements about ICOs have included pointed warnings to “market professionals” which underscores “additional potential liability of secondary actors of ICOs.”  Actors such as lawyers, accountants, broker-dealers, investment advisors and consultants could find themselves the target of claims if an ICO investment goes wrong. These actors may well have insurance in place for the services they provide. These market professionals “should ensure that their own professional liability exposure is adequately protected in the event of an ICO-related claim.”
Finally ICO companies and companies operating cryptocurrency exchanges could find themselves targeted in cyber fraud attacks. (Indeed, earlier this week a South Korean cryptocurrency exchange announced that it was filing for bankruptcy after it was hit with its second data hack this year.) ICO companies and companies operating cryptocurrency exchanges “should consider purchasing cyber and crime coverage, including coverage for social engineering [fraud], to protect from hackers or other fraudulent actors who attempt to infiltrate computer systems to benefit from or disrupt the ICO.”


Upcoming PLUS Webinar: On January 4, 2018, I will be moderating a Professional Liability Underwriting Society (PLUS) webinar with the title of “D&O Roundtable: Disruption and the Potential Effects on Organizations.” The hour-long webinar, which will take place at 11:00 am EST, will include a panel of distinguished speakers: Sara Brody, Partner at Sidley Austin LLP, Jessica Corley, Partner at Alston & Bird LLP, and Bryan Kocon, Business Unit Leader – Public Company Liability at Travelers Insurance. A brief description of the webinar and registration can be found here.