Litigants are stepping up a block (sorry!) in the US, with a class action complaint being filed against Block.one, CEO Brendan Blumer, CTO Dan Larimer, former Chief Strategy Officer Brock Pierce and former partner Ian Grigg. The complaint is made by the Crypto Assets Opportunity Fund (CAOF), along with individual investor Johnny Hong, on behalf of investors in EOS generally.
The complaint was filed in District Court in the Southern District of New York, a popular jurisdiction for securities litigation and turns on the allegation that EOS purposefully misled investors and artificially inflated the EOS token price during its initial coin offering (ICO), which ultimately raised over USD$4.1 billion between June 2017 and June 2018.
In the claimant's words (at paragraph 2):
This case arises out of a fraudulent scheme, fueled by a global frenzy over cryptocurrencies and unchecked human greed, to raise billions of dollars through sales of a cryptocurrency called EOS – an unregistered security – to investors in violation of the United States federal securities laws.
Paragraphs 140 to 185 detail the five causes of action being pleaded by the plaintiffs. The first three causes relate to alleged breaches of the US Securities Act, namely sections 5, 12(a)(1), 12(a)(2) and 15, which relate primarily to Block.one's failure to register its ICO with the US Securities and Exchange Commission (SEC).
The fourth and fifth causes of action relate to Block.one, and its key officers, allegedly making deliberately misleading and deceptive statements prior to and during the EOS ICO, with a view to artificially inflating the price of EOS.
These last claims are the most important, as they have the broadest potential application. Notwithstanding that there are many compliant offerings out there, this ought to serve as a reminder that every business is susceptible to claims of misleading and deceptive conduct.
Particularly when, like EOS, you make claims like:
Everything will be better, faster and cheaper. Everything will be more connected. Everything will be more trustworthy. Everything will be more secure.
(Paragraph 81, quoting CSO Brock Pierce in 2018)
This class-action follows Block.one's USD$24 million settlement with the SEC in September 2019, following the SEC's allegations that Block.one was operating an unregistered securities sale. Relevantly to the present complaint, SEC co-Director in the Division of Enforcement Steven Peikin said in a statement that Block.one had failed to provide investors with the information typically included in a securities sale. Whether Block.one will get off as lightly this time remains to be seen. At the time CAOF wrote, in an investor update:
In the time following the settlement announcement EOS has in fact appreciated relative to both bitcoin and the dollar.
If the complaint goes to judgment, the case may be instructive for Australia, particularly as ASIC has indicated that it is ready and willing to enforce the misleading and deceptive conduct prohibitions in the Corporations Act and ASIC Act.