The Southern District of New York declined to dismiss a complaint against a technology start-up that offered digital assets through an unregistered initial coin offering. According to the court, the complaint established that the virtual currency at issue was an “investment contract” under the test set forth in SEC v. W.J. Howey Co. and, thus, a security under the federal securities laws because of “the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.” The court also rejected the defendants’ contention that it lacked personal jurisdiction over them and appointed a lead plaintiff to represent the class (Balestra v. ATBCOIN LLC, March 31, 2019, Broderick, V.).
ICO. From June 2017 through September 2017, ATBCOIN conducted an ICO through which it offered digital ATB Coin to the general public in exchange for other digital assets. The primary purpose of the ICO was to raise capital to enable ATBCOIN and its co-founders to launch a new blockchain on which the ATB Coin would operate. In promotional materials, ATBCOIN and its co-founders stated that the ATB Blockchain would be “the fastest blockchain-based cryptographic network in the Milky Way galaxy,” and the value of the ATB Coins was expected to increase as more users adopted the ATB Blockchain. The ICO raised over $20 million from thousands of investors, and the blockchain was launched in September 2017. However, the ATB Blockchain was much less capable than advertised and failed to deliver many of the promised features. As a result of the poor performance, the value of ATB Coins has continuously decreased.
An ATB Coin holder filed a complaint alleging that ATBCOIN and its co-founders violated Securities Act Section 12(a) by offering and selling unregistered securities and that the co-founders are also liable for ATBCOIN’s violation as control persons. The defendants moved to dismiss, arguing that ATB Coin is not a security and that the court lacked personal jurisdiction.
ATB Coin is a security. Under the Howey test, the determination of whether a particular offering involves an investment contract (and, thus, a security) turns on whether there is an investment of money in a common enterprise with an expectation of profits to be derived from the efforts of others. The court noted that a plaintiff may demonstrate a “common enterprise” by pleading the existence of “horizontal commonality,” meaning that “‘the fortunes of each investor in a pool of investors’ are tied to one another and to the ‘success of the overall venture.’” The funds raised through the ICO were pooled to facilitate the launch of the ATB Blockchain, which, if successful, would increase the value of ATB Coin, the court stated.
In addition, according to the court, the complaint sufficiently pleaded that the value of ATB Coin was entirely dependent on the defendants’ success in launching the ATB Blockchain. Although ATB Coin purchasers had control over their coins, the court explained, they had no control over the development of the ATB Blockchain and relied on ATBCOIN and its co-founders to successfully launch it and thereby increase the value of ATB Coin. As such, the court found, the complaint plausibly alleged facts demonstrating that the ATB Coin qualifies as an “investment contract” under the Howey test.
The court also found that the complaint adequately alleged that the co-founders can be held both primarily liable and liable as control persons for ATBCOIN’s unregistered ICO. The individual defendants were personally involved in publicizing the ICO and engaged in specific efforts to pitch ATB Coin to potential investors. Further, the court stated, as the sole members and officers of ATBCOIN, they stood to directly benefit from sales of ATB Coin. The individual defendants’ leading roles in promoting ATBCOIN’s lone product are sufficient at the dismissal stage to establish their status as control persons under the Securities Act, the court concluded.
Other issues. The court also declined to dismiss the complaint on the ground that it lacked personal jurisdiction over the defendants. The claims arise under the Securities Act, which authorizes nationwide service of process, the court stated. Moreover, according to the court, the complaint provided “ample evidence” that the individual defendants targeted the U.S. market in promoting the sale of ATB Coin, including a press release stating that they had attended a conference in New York regarding the launch of ATB Coin. “Given their substantial suit-related conduct in the United States,” the court found, exercising jurisdiction over the individual defendants would not offend due process.
Finding that the complainant established his large financial interest in the litigation and otherwise meets applicable Rule requirements and that and no party has rebutted his claim to be the most adequate plaintiff, the court appointed him as lead plaintiff and approved his selection of Levi & Korsinsky, LLP as lead counsel.
The case is No. 17-CV-10001 (VSB).
An ATB Coin holder filed a complaint alleging that ATBCOIN and its co-founders violated Securities Act Section 12(a) by offering and selling unregistered securities and that the co-founders are also liable for ATBCOIN’s violation as control persons. The defendants moved to dismiss, arguing that ATB Coin is not a security and that the court lacked personal jurisdiction.
ATB Coin is a security. Under the Howey test, the determination of whether a particular offering involves an investment contract (and, thus, a security) turns on whether there is an investment of money in a common enterprise with an expectation of profits to be derived from the efforts of others. The court noted that a plaintiff may demonstrate a “common enterprise” by pleading the existence of “horizontal commonality,” meaning that “‘the fortunes of each investor in a pool of investors’ are tied to one another and to the ‘success of the overall venture.’” The funds raised through the ICO were pooled to facilitate the launch of the ATB Blockchain, which, if successful, would increase the value of ATB Coin, the court stated.
In addition, according to the court, the complaint sufficiently pleaded that the value of ATB Coin was entirely dependent on the defendants’ success in launching the ATB Blockchain. Although ATB Coin purchasers had control over their coins, the court explained, they had no control over the development of the ATB Blockchain and relied on ATBCOIN and its co-founders to successfully launch it and thereby increase the value of ATB Coin. As such, the court found, the complaint plausibly alleged facts demonstrating that the ATB Coin qualifies as an “investment contract” under the Howey test.
The court also found that the complaint adequately alleged that the co-founders can be held both primarily liable and liable as control persons for ATBCOIN’s unregistered ICO. The individual defendants were personally involved in publicizing the ICO and engaged in specific efforts to pitch ATB Coin to potential investors. Further, the court stated, as the sole members and officers of ATBCOIN, they stood to directly benefit from sales of ATB Coin. The individual defendants’ leading roles in promoting ATBCOIN’s lone product are sufficient at the dismissal stage to establish their status as control persons under the Securities Act, the court concluded.
Other issues. The court also declined to dismiss the complaint on the ground that it lacked personal jurisdiction over the defendants. The claims arise under the Securities Act, which authorizes nationwide service of process, the court stated. Moreover, according to the court, the complaint provided “ample evidence” that the individual defendants targeted the U.S. market in promoting the sale of ATB Coin, including a press release stating that they had attended a conference in New York regarding the launch of ATB Coin. “Given their substantial suit-related conduct in the United States,” the court found, exercising jurisdiction over the individual defendants would not offend due process.
Finding that the complainant established his large financial interest in the litigation and otherwise meets applicable Rule requirements and that and no party has rebutted his claim to be the most adequate plaintiff, the court appointed him as lead plaintiff and approved his selection of Levi & Korsinsky, LLP as lead counsel.
The case is No. 17-CV-10001 (VSB).