Litigation: Lessons for Promoters?

By JamesIrving | Legal Mongrel | 22 Jun 2020

Photo: Statue of Justice, the promoter of the EOS token, is currently facing two class-action lawsuits. There have been a number of lawsuits in the US against promoters of ICOs, security tokens (STOs), and the operators of trading exchanges. Some of these cases are part of the aftermath of the 2017 ICO boom, including these two lawsuits.  Some of these cases follow enforcement action taken by the SEC. These two cases fit that pattern.

In this post, I will review some of the claims made by the plaintiffs in these cases. I should say that I have had no personal involvement, positive or negative, with or EOS. I am simply reporting on what the plaintiffs’ Complaints say. We should remember that these documents tell only one side of the story, and that will no doubt respond to the allegations.

Williams & Zhang v and Others

(US District Court SDNY, Case 1:20-cv-02809-LAK), complaint filed April 3, 2020.

The Complaint in this case makes a number of allegations which are familiar from other similar cases, in particular that the ERC-20 tokens that were offered for sale were a security that should have been registered with the SEC before being offered for sale to members of the public. Accordingly, the plaintiffs say that engaged in unauthorised security sales, regardless of the fact that intended to use different tokens on its blockchain once that was built, and allow token holders to exchange their purchased tokens for the new type.

According to the Complaint, made many claims about its project to investors located in the US which should have been the subject of a SEC registration statement. The plaintiffs point out that the EOS token purchase agreement issued by said that the tokens were not securities. One important fact is that the commencement of the ICO predated the release by the SEC in April 2019 of its Framework for working out whether a digital asset is a security. In other words, even if, the investors and even the SEC believed that the tokens were not securities, because the issue began prior to the publication of this authoritative guideline by the SEC, the Complaint alleges that the issue was still in breach of the law. As things turned out, the SEC decided that the tokens were indeed securities, and took enforcement action against That official enforcement action is now followed by this class action lawsuit.

Common to other lawsuits of this type, the plaintiffs argue that the Howey test has been satisfied by's actions. For an explanation of this legal test, please see my previous post for Publish0x on The Regulation of STOs. The plaintiffs here also make the point that the EOS token that was issued by was a security right from the time of its issuance because the value of the token depended on the “managerial efforts” of the promoter, rather than market forces of supply and demand, which for example determine the price of gold or Bitcoin, and which are therefore commodities (not securities): see para 88 of the Complaint. The plaintiffs allege that they suffered loss as a result of’s breaches of the law, presumably through the decline in the value of their tokens after the blockchain failed to meet its advertised capabilities. Unlike some of the other digital asset related lawsuits that we have seen, this lawsuit also alleges breaches of State “blue sky” investment laws, in particular the laws of New Jersey and Texas.

Crypto Assets Opportunity Fund LLC and Hong v and Others

(US District Court SDNY, Case 1:20-cv-03829-LAK), complaint filed May 18, 2020.

This Complaint is similar to the one filed by Williams & Zhang, reviewed above, but in some respects goes further in its allegations. Like the plaintiffs in  Williams & Zhang, these plaintiffs allege that sold unregistered securities. On top of that, however, these plaintiffs also claim that engaged in fraud and/or made negligent statements, which cased the plaintiffs loss.

These additional, and possibly more serious allegations, are based on a number of comments that the principals of made publicly. As an example, one of’s founders (Brock Pierce) is quoted in the Complaint as having said: “Everything will be better, faster, and cheaper. Everything will be more connected. Everything will be more trustworthy. Everything will be more secure. Everything that exists is no longer going to exist in the way that it does today. Everything in this world is about to get better," [para 60].  The Complaint states that, far from creating a revolutionary new decentralised blockchain,'s creation was not really decentralised and didn’t work properly, anyway. The plaintiffs allege that this result was not accidental, but was the result of deliberate fraud by and its principals. As with the Williams & Zhang lawsuit, the plaintiffs claim breaches of the US Securities Act and also the “blue sky” laws of Texas, which caused them losses.


As mentioned above, these cases are a long way from being resolved, and therefore the allegations are as yet unproved. As with the other cases that I have reviewed in earlier posts for Publish0x, in retrospect people might see that made a mistake by not registering its ICO with the SEC, although in’s case the SEC had not yet published its authoritative Framework document yet, and it may argue that it didn't know any better. This in turn may raise questions about level of investigation that ICO and STO promoters should conduct into their legal compliance requirements, and whether the SEC has been slow to publish guidelines.

In addition, the Crypto Assets Opportunity Fund case also raises the issue of whether the promoters of a blockchain project that does not live up to its hype will in future face allegations of fraud. What, for example, are we to make of the statements by Brock Pierce quoted above? Were these “mere puff” - in the terminology of the old court cases - the kind of enthusiastic hyperbole that we should expect to hear from promoters of new products and not take too seriously? Or were they sinister lies made to deliberately entice and deceive investors? The court will decide. In the meantime, the promoters of STOs and ICOs would do well to take note of these cases and ensure that their offerings comply with applicable laws, and also be careful not to make overambitious claims that could in future be seen as misleading or deceptive.

[Photo credit:  Statue of Justice (Triumph of the Republic) by Jules Delou, a public domain image courtesy of Wikimedia Commons CC BY-SA 2.0.  This post is a a basic level, educational and informational discussion of legal concepts. It does not constitute legal advice for any person, nor does it create a lawyer/client relationship with any person. Although care has been taken to ensure that the law is described correctly at the time of publication, no guarantee of accuracy is provided.]

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