SAN FRANCISCO (CN) – In a case involving novel issues of whether digital currency investments are subject to U.S. securities laws, a federal judge on Tuesday advanced a class action against a husband and wife team that raised $232 million for a new cryptocurrency.
U.S. District Judge Richard Seeborg refused to dismiss lead plaintiff Arman Anvari's class action against Tezos virtual currency creators Arthur and Kathleen Brietman, their company Dynamic Ledger Solutions (DLS) and Tezos Stiftung, the Swiss foundation they set up to oversee an initial coin offering in July 2017.
After touting Tezos as the "solution" to shortcomings plaguing other digital currencies, the Breitmans organized a "crowdsale" in 2017 to help finance the creation of a new blockchain, or secure network for exchanging Tezos tokens.
Four class actions were filed and later consolidated after an internal dispute delayed the launch of the new Tezos blockchain last fall.
The defendants say the initial coin offering was merely a fundraiser, not an investment scheme, and that they have no obligation to provide Tezos tokens to contributors. The plaintiffs say the contributions were investments, which means the defendants were required to register with the U.S. Securities and Exchange Commission before accepting money.
The Breitmans argued they could not be liable for the sale of unregistered securities because a separate Swiss entity, Tezos Sitfung, oversaw the initial coin offering. Seeborg rejected that argument, finding the couple and the foundation were "deeply intertwined, if not functionally interchangeable" throughout the process.
Seeborg found allegations the Breitmans developed websites and applications used for the initial coin offering, and promoted the fundraiser on popular online forums, adequately support a conclusion that their involvement rose well above the level of "collateral participation."
The judge also rejected claims the lawsuit seeks to apply U.S. securities laws to conduct that occurred overseas. Although a Swiss foundation oversaw the initial coin offering, Seeborg found the Breitmans’ development of key elements for the project took place in California, and that marketing for the offering almost exclusively targeted U.S. investors.
In rejecting the extraterritorial argument, Seeborg also noted the lead plaintiff initiated his investment transaction on a website hosted on a server in Arizona, and that his contribution of the digital currency Ethereum was "validated by a network of global 'nodes' clustered more densely in the United States than in any other country."
Seeborg dismissed some defendants with leave to amend, including American venture capitalist Tim Draper. Draper invested $1.5 million in DLS, gaining a board seat and 10 percent ownership stake in the company, and publicly touted Tezos. But Seeborg found Anvari failed to show he relied on anything Draper said when he chose to invest in Tezos.
Additionally, Seeborg dismissed the company Bitcoin Suisse as a defendant, finding its role in providing virtual currency conversion services for Tezos investors makes it "not appear to be a key player in this action."
Anvari is represented by Hung Ta of New York, who did not return a request for comment by press time.
The Breitmans are represented by Brian Klein of Baker Marquart in Los Angeles, who said he believes his clients will eventually prevail.
"Although we are understandably disappointed by today’s ruling, this was not a decision on the merits of the case," Klein said. "We believe Kathleen, Arthur, and DLS will ultimately be fully vindicated. They did not violate any laws and Tezos contributors were not harmed."
In June, Tezos unveiled a test version of its blockchain, or digital exchange system for Tezos tokens, after months of delay.
As of Tuesday afternoon, a single Tezos unit was valued at $1.70, down 4.8 percent and dramatically lower than its all-time high of $10.39 in mid-December 2017.Follow @NicholasIovino
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