The co-founders and associates of the beleaguered Tezos project are facing a second lawsuit over the messy aftermath of its ICO this year. The suit could have implications for future ICOs, which many participants see as profit-making investments.
Tezos Raised $232 Million and Unwanted Attention
Tezos raised $232 million USD in a record-breaking ICO in July 2017, grabbing mainstream headlines. Unfortunately it also led to a rift between the co-founders Arthur and Kathleen Breitman, and a Swiss foundation they’d established to handle Tezos’ governance.
Reuters reported the new class action suit was filed in the U.S. District Court in Florida by law firm Silver Miller, on behalf of a group of people who bought Tezos tokens. Also targeted in the suit are the Tezos Foundation and the Breitmans’ Delaware-registered entity Dynamic Ledger Solutions, that owns much of Tezos’ IP.
At issue is a reported prior deal between Dynamic Ledger Solutions and Tezos Foundation, led by Johann Gevers. Reuters said the foundation, which holds the ICO money, was due to purchase Dynamic Ledger Solutions’ IP in a transaction that could take three years to complete — something not disclosed to purchasers.
Bitsonline reported the Breitmans spoke on stage last month at Money20/20 in Las Vegas, appearing embarrassed over the debacle and promising it would be sorted out soon. Arthur Breitman asked stakeholders to bear with them, while Kathleen Breitman said the existing situation “stinks”.
Are ICOs Unregistered Securities or Even Investments?
The suit and overall story will raise further questions over whether ICOs and token sales represent investments — or at least whether token buyers consider them to be.
Silver Miller will argue that its clients did indeed see their Tezos tokens as an investment. If they prove their case and prove the tokens were unregistered securities, it could have implications for other similar fundraisers.
ICOs, or initial coin offerings, have offered an effective new avenue to large capital injections for startups. As well as offering access to a worldwide pool of buyers, they can be done outside the usual regulatory requirements.
While they’ve raised over $2.3 billion for operators in 2017, ICOs have also raised regulators’ eyebrows. Chinese authorities banned them outright (and retroactively) in September 2017, while the U.S. SEC has issued a series of investor warnings. Earlier this month it cautioned against “unlawful promotion” of ICOs using the popular tactic of celebrity endorsements.
Many ICO organizers these days specify explicitly that token sales do not represent securities and should not be regarded as investments. In the end, however, court precedent may also play a role in determining this.
What will happen to the funds raised by Tezos? Let’s hear your thoughts.
Images via Jon Southurst, Tezos