By Grant Ferowich

Initial coin offerings (ICOs) have given fraudsters a new opportunity to dupe the public, but under U.S. securities law, investors may be able to recoup some of their money.

“The Tezos initial coin offering is a textbook definition of how NOT to raise money for blockchain projects,” the Restis legal team said Saturday. DLS has been valued at $232 million, attorneys said, despite lacking clients and working production systems.

Based in San Diego, California, the Restis law firm is exploring a class-action suit against the company that owns the Tezos network, Dynamic Ledger Systems, to refund U.S. investors who bought in to the largest ICO to date. “The ICO fundraising tool” is subject to the “umbrella of the federal securities law” in the U.S., Restis said.

ICOs allow companies to raise money by developing tokens backed by ethereum or bitcoin, which are easy to liquidate. The bitcoin market, for instance, has $2.1 billion in trading volume over the past 24 hours. About $390 million worth of ethereum has been traded during the same time period.

Reuters reported Wednesday that, “from January through September, ICOs generated $2.2 billion, more than three times the amount invested in similar startups by traditional venture capital firms, according to Novum Insights, a data provider.”

Tezos purports to be a “a new decentralized blockchain that governs itself by establishing a true digital commonwealth.” The rights to the project are wholly owned by Kathleen and Arthur Breitmans’ Digital Ledger Systems, according to Restis.

The software has yet to complete alpha testing. The Breitmans recently complained about struggling to “scale up the development team,” a.k.a. find people to work on the software, “despite the resources now available.”

A number of red flags with the ICO attracted legal scrutiny.

  1. Sharing different information with DLS insiders and the public, then making a profit on the spread. The company’s intellectual property was sold to venture capital backers, including high profile investor Tim Draper, at a valuation of around $6 million in the first half of 2017, approximately in line with valuations for VC-backed seed stage firms. A few months later, when the ICO was available to the public during the first two weeks of July, the Tezos IP was touted to retail investors at a $232 million valuation. 

Go deeper: It remains a mystery how the IP became 32 times more valuable over a few short months without furnishing a complete product or getting customers. The jacked-up valuation may be “due to the hype and interest created by bringing marquee name venture capitalists on board,” Expat Ventures notes.

  1. Funneling a minimum of 8.5 percent of ICO funds to DLS shareholders instead of the Tezos project itself.
  2. Running an innovative variant of a ponzi scheme. A Tezos Foundation fund of $50 million has been established to invest in companies using Tezos, which “creates the appearance of demand for the Tezos network.”
  3. Sketchy corporate governance practices. There’s a public tongue lashing on display between the Breitmans, who posted their grievances on Medium, and Johann Gevers, Tezos Foundation president. The Breitmans said Gevers was involved in an “attempt at self-dealing,” while Gevers told Reuters October 18 the statements were “outright lies.”

“Raising capital is not new, and creative fraudsters have been fleecing trusting investors since time immemorial. It’s time to call a spade a spade and bring the ICO fundraising tool within the established and trusted umbrella of the federal securities laws. Investors can only benefit as the ICO space matures and issuers have liability for any misconduct,” the Restis Law Firm said.

If Restis follows through with the lawsuit, regulators are likely to train a closer eye on ICOs. Regulation might add credibility to ICOs, but compliance would be costly, thus introducing new barriers to entry. On September 29, the U.S. Securities and Exchange Commission charged two companies with ICO fraud for making false “promises of sizable returns from novel technology,” said Andrew Calamari, director of the SEC’s New York regional office.

An investor alert from August 28 states that the regulator “may suspend trading in a stock when the SEC is of the opinion that a suspension is required to protect investors and the public interest.”

The Ferowich Report is an independent news and analysis information service based in Washington, D.C. Please send inquiries and feedback to