ICO Litigation: Deconstructing an ICO Class Action

April 16, 2019

ICO litigation is on the rise. To help businesses better understand these cases and how authorities are handling them, we’ve deconstructed a legal battle currently making its way through the courts: Balestra v. ATBCoin, out of the Southern District of New York.

Balestra v. ATB Coin: Origin Story

Back in 2017, ATBCoin’s ICO raised about $20 million. A hot digital commodity at the time, the company marketed itself as “an innovative decentralized cryptocurrency” that would be “the fastest blockchain-based cryptographic network in the Milky Way galaxy.” ATB also promised “near-zero cost payment to anyone in the world.”

ATB, however, failed at one crucial thing: registering with the Securities and Exchange Commission.

Fast forward a few months. ATB’s token didn’t perform as well as hoped, and its value plummeted 85 percent. Unimpressed, in December 2017, investors filed a class action alleging violations of the Securities Act. Namely, that ATB knowingly sold fraudulent, unregistered financial securities.

Expectantly, ATB filed to dismiss the case, claiming inappropriate jurisdiction and failure to state a valid claim.

Balestra v. ATB Coin: Judge’s Take (So Far)

In this first courtroom round, the judge sided with the claimants.

Since the defendants had attended several conferences in New York to promote their ICO, and since one of the company’s co-founders resides in the state, the court quickly threw out the jurisdiction claim.

When the judge considered whether or not the defendants needed to register with the SEC, he turned to the Howey Test, the four-pronged standard for determining if a given investment opportunity qualifies as a security under the law.

The defendants argued that ATB didn’t rise to the Howey standard on two counts: “common enterprise” and “profits from the efforts of others.”

The court disagreed, reasoning that:

“Defendants encouraged investors to purchase ATB Coins based on the claim that the speed and efficiency of the ATB Blockchain would result in an increase in the coins’ value.” With regards to Howey, this reasoning satisfies the last prong, which addresses “profits from the efforts of others.”

The judge also cited a 2017 consent order from an SEC administrative case in which authorities ruled that a token can be a security even if investors aren’t granted a pro rata distribution of profits. Since ATB’s token value was dependent on the success of the company, it met the standard. The court also pointed to marketing material that included the word “investment.”

Balestra v. ATB Coin: Moving Forward

This fight is not over. Now that the judge threw out the motion to dismiss, both parties will go back to their respective camps and strategize. They’ll either agree to a settlement or continue on to a full trial.

Connect with an ICO Lawyer

The Gordon Law Group works with ICOs of all sizes on compliance and execution. We also maintain an ICO litigation practice. If you have questions or you’re facing a legal action, get in touch today. We have the answers and experience you need.

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