The lead attorney in a historic and massive class-action suit tells Decrypt that crypto ICOs were an ‘egregious’ breach of securities laws.
Did you buy any EOS, TRX, BNT, CVC, KNC, QSP, SNT during their initial coin offerings in 2017-18? If so, the solicitors from Roche Cyrulnik Freedman want to hear from you. The attorneys for the biggest series of class-action suits in the history of crypto are gearing up for battle—and they’re casting the net for more investors who lost money, according to lead attorney Kyle Roche, who spoke with Decrypt in an interview today.
The class-action suits, filed in a Manhattan district court Friday, promise to be massive and costly.
“I think this is one of the more egregious examples of the selling of unregistered securities here in the United States. The defendants made many billions off such scale, and I think that is the historic nature of this case,” he said.
Roche said the class-action suits were long overdue. Legal experts, as well as the SEC, have argued that many of the tokens that emerged during the 2017-2018 ICO boom were illegal securities offerings. The companies who issued them, as well as the exchanges who listed them, got rich by skirting US federal and state securities laws, critics say.
Roche’s law firm is co-leading the series of complaints with Selendy & Gay, another New York law firm. Both firms also work together on the Bitfinex market manipulation suit.
The plaintiff’s case
The dozen lawsuits targeted token issuers Block.one (EOS), Tron (TRX), Bancor (BNT), Civic (CVC), Kybercoin (KNC), Quantstamp (QSP), and Status (SNT). Four exchanges who listed the tokens—Binance, Bitmex Bibox, and KuCoin—were also sued.
None of the defendants responded to Decrypt’s requests for comment.
While the claims against the issuers and exchanges are similar, they have some material differences. “But at the end of the day, they solicited US individuals to buy unregistered securities and to sell them in the United States,” Roche said.
As Roche noted, all of the tokens in the complaints are ERC-20 tokens—referring to an Ethereum token standard that allows anyone to create digital assets, in a matter of minutes. The standard also makes it easy for exchanges to list and begin trading tokens. All of this allowed the 42 defendants named in the complaints to take advantage of investors at a time when people were excited about Bitcoin and Ethereum, Roche said.
The defendants “used the enthusiasm for Bitcoin and Ethereum to lure investors who didn’t understand the true nature of what they were purchasing,” he said. “They weren’t purchasing this decentralized cryptocurrency; they were purchasing something that was created through a centralized process. And those investors lost a lot of money.”
Indeed, several of the named tokens spiked in price during the crypto boom period of late 2017 to early 2018. They then crashed in price, with some losing more than 90 percent of their value. That was a huge loss to anyone who bought in at the wrong time.
Unfair playing field
In the US, cryptocurrency exchanges, such as Coinbase and Gemini, have rigorous compliance and regulatory departments to ensure they’re complying with federal law, and state laws, Roch said.
But the exchanges named in the class actions skirted those laws, which gave them a huge unfair advantage in selling tokens to US citizens. And for those who did play by the rules, it creates a “fundamentally unfair” advantage, said Roch. The exchanges named in the complaints raked in money by taking fees for every trade, and through charging extravagant listing fees. Binance, for example, allegedly received large cash payments from issuers seeking to list tokens. These fees often exceeded $1 million per listing, according to the law firm.
Roch says he is a “strong believer” in cryptocurrencies and blockchain technology. But to have these types of products and these types of innovative platforms, people have to play by the same set of rules. For exchanges such as Binance and Bitmex, “they just refused to do so and sold unregistered securities in the United States,” he said.
Blue sky laws
On the federal level, when you sell a security in the US, you must either register that security with the Securities and Exchange Commission or sell it under a valid exemption, the most common being Regulation D.
But several states, including Illinois, Texas, Massachusetts and New York, have their own securities regulations—so-called “Blue Sky laws.” The term was created by a Supreme Court justice who wanted to protect investors from “speculative schemes which have no more basis than so many feet of blue sky.” Under these laws, investors are entitled to “rescission”—unwinding the contract—as well as interest, and attorney fees and costs. If enough claimants come forward in those states, those blue sky laws can be applied in the federal case as well, Roche said.
After the service of the complaint, the law firms have 60 days to find crypto investors who lost money who want to join the class action. “We encourage them to reach out to us, Roche said. “As attorneys, we want to get as many facts as possible, but just as importantly, other individuals who lost substantial sums of money can also be potential lead plaintiffs in the action.”