U.S. Ninth Circuit - The FindLaw 9th Circuit Court of Appeals Opinion Summaries Blog

$232 Million Cryptocurrency 'Crowdsale' Case Proceeds Against Founders

Arthur and Kathleen Brietman say they raised funds for their cryptocurrency startup, but they had no obligation to give contributors any tokens back.

Of course, that was a surprise to the people who sued in four class actions. They say the Brietmans defrauded them and violated securities laws in a $232 million "crowdsale."

A judge says the plaintiffs have a case, and his say-so matters most. The plaintiffs may not get any tokens, but their case raises new questions about whether digital currencies are subject to securities laws.

Tezos Virtual Currency

Judge Richard Seeborg denied the defendants' motion to dismiss, which allows Aram Anvari to proceed against the Brietmans, their Tezos virtual currency company, and a foundation they set up for an initial coin offering in 2017. Anvari is the lead plaintiff in the consolidated class actions.

The defendants claim the ICO was a fundraiser, not an investment. The plaintiffs say they invested their money, and expected to receive Tezos currency in exchange.

The Brietmans set up Tezos Sitfung, a Swiss entity, to handle the offering. The judge had to decide whether that insulated them from securities laws.

Seeborg found enough evidence that the Brietmans and their foundation were "deeply intertwined, if not functionally interchangeable." He said they were involved well above the level of "collateral participation."

Novel Legal Questions

From the outset, Seeborg is confronting novel legal questions. Typically, the judge announces tentative rulings before hearing arguments.

"In this instance, I'd rather just hear arguments," he said.

The big question is whether initial coin offerings can be regulated as securities. The Securities and Exchange Commission says yes.

Meanwhile, Tezos are valued at $1.70, down from its all-time high of $10.39 cents in December last year.

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