November 16, 2017 (The Ferowich Report) — The largest initial coin offering to date, the Tezos ICO, which raised $232 million in July worth of ethereum and bitcoin that’s now valued around $400 million, has been served with two lawsuits for defrauding Tezzie investors.
Andrew Baker, represented by counsel Taylor-Copeland Law, sued against Andrew and Kathleen Breitman, Johann Gevers, a PR firm hired by Tezos, and the Breitmans’ jointly owned Dynamic Ledger Solutions this week with the Superior Court of the State of California.
The class-action suit alleges that the Tezos team committed several securities law violations:
- selling unregistered securities,
- fraud in the offer and sale of securities
- false advertising
Sam Guzik, a securities lawyer, told Crowdfund Insider that “while the debate rages on the issue of whether – and under what circumstances – a “Token” is a security under US securities laws – the plaintiffs’ class action securities bar has quickly stepped in to fill this vacuum.” Ultimately, though, Guzik does not anticipate any “bright line” tests to emerge on the status of ICO sales as securities offerings since “most state judges are … inexperienced in securities law.’”
On November 15, a law firm based in Coral Gables, Florida also sued Tezos and the Breitmans. The firm, Silver Miller, was more optimistic about the classification of Tezzies as securities, which would therefore allow ICO crowdfunding and associated activites to fall under the umbrella of the Securities Act. Significantly, if ICO tokens are not considered securities, investors won’t be able to legally accuse Tezos of securities fraud.
“Everyone in the initial coin offering world know there was going to be a day of reckoning regarding whether ICOs are securities,” Silver Miller said.
As the United States Securities and Exchange Commission and Commodity Futures Trading Commission have said in the past that they “consider the actual substance and purpose of the activity” when designating As the old saying goes, ‘if it walks like a duck, and it quacks like a duck, it’s a duck,’” the Florida law firm said.
What is a security, exactly? The U.S. Supreme Court has said the definition of a security is “quite broad.” According to the Court’s Marine Bank v. Weaver ruling, the term security “includes ordinary stocks and bonds, along with the countless and variable schemes devised by those who seek the use of money of others on the promise of profits.”
A corporate governance mess: Infighting among the Tezos team has all but stalled the project. Gevers, president of the Tezos Foundation, and the Breitmans have engaged in a bitter public feud. The Brietmans accused Gevers of self-dealing, while Gevers has maintained that the attacks are part of a hostile takeover attempt.
Tezos was once a darling of the cryptocurrency space. Venture capitalist threw Tom Draper threw his backing behind Tezos, ultimately helping to boost the project’s legitimacy and percieved public value.
Draper acquired Tezzies during a closed-door pre-sale in which he purchased tokens on the basis of a $6 million valuation of Tezos IP in early 2017, while retail investors ended up valuing the Tezos IP at $232 million. Another high-powered attorney in San Diego, Restis Law, said that sharing different information with insiders and the public raised a major red flag.
For his part, Draper denies the collusion allegations.
“There was nothing secretive about our purchase of Tezos. We invested for ownership in the company, which at the time was two bright young people and an idea. The sale might not have happened at all! We also participated in the Pre-sale. Most ICO founders earn tokens over time. All tokens we hope to receive that we didn’t buy in the Pre-sale (alongside with all the other investors who participated) will vest over time with the founders’ tokens. I have no intention of selling these tokens because I am a true believer in the Tezos mission: to build a Blockchain on proof of stake and open it up for developers to build and invent on a new and more relevant platform,” Draper told Cointelegraph November 4.