Tezos Faces Class-Action Suit Alleging Unregistered Sale of Securities, False Representations

A class action lawsuit filed on October 25 in the Superior Court of the State of California alleges that the now-notorious Tezos token offering involved the sale of unregistered securities and was fraudulent and falsely advertised. The offering raised cryptocurrency worth approximately $232 million for the Tezos Foundation, which by press time was worth well more than double that figure. The suit seeks the refund of contributed money as well as damages and costs.

Plaintiff Andrew Baker filed the case on behalf of himself and a putative class of all purchasers of “Tezzies” (the yet-to-be-minted tokens associated with the Tezos blockchain)which the lawsuit estimates may be as many as 30,000 individuals. Baker alleges that although the tokens fit the definition of a security contained in the Securities and Exchange Commission’s (SEC) report on The DAO, the defendants never registered the Tezzies with the SEC. 

The defendants include Dynamic Ledger Solutions, Inc. (DLS), which owns the source code relating to the Tezos blockchain and all “Tezos-related intellectual property,” as well as DLS co-founder and CTO Arthur Breitman and DLS co-founder and CEO Kathleen Breitman, who are married. Also named in the suit are Strange Brew Strategies, LLC (a firm the Breitmans hired to promote the token offering), the Tezos Foundation (a Swiss organization the Breitmans helped create in order to run the offering), and Johann Gevers (the Foundation’s embattled president whose power struggle with the Breitmans was made public in October, allegedly contributing to a nearly halving in the value of Tezos futures).

Brian Klein of Baker Marquart LLP, who is representing the Breitmans in the case, described his clients as “brilliant entrepreneurs and visionaries” who “should never have been sued” because, according to him, the lawsuit lacks merit. 

A Reuters article shed some potential light on the facts on which defendants might rely, as it reported that the terms of the offering did not guarantee contributors would receive tokens and cautioned that the Tezos project could “be abandoned.” The article also noted that defendants have claimed the cryptocurrency sent in connection with the offering was merely a “non-refundable donation.” However, the complaint asserts that the plaintiff was not aware that his contribution represented a non-refundable donation, believing instead that he was making a “speculative investment.” The complaint further contends that the plaintiff contributed to the token offering without being aware of the supposed terms identified in the Reuters article. In June 2017, Kathleen Breitman gave an interview in which she used the word “sell” to describe the Foundation’s relationship to the tokens in question, though she quickly clarified that they were “up for donation.”

In addition to failing to register Tezzies as securities, the lawsuit alleges that defendants made several material misrepresentations, including falsely stating the timeframe for the launch of the Tezos blockchain, which has thus far moved from August or September 2017, as allegedly represented to investors, to “February 2018 at earliest,” as stated in the complaint. The launch date is important, as that is when Tezzies can first be issued. The plaintiff also alleges that Strange Brew Strategies falsely informed Reuters that “Ernst & Young, Deloitte, LeciFi, etc. have adopted Tezos in their development environments and labs” and claims that this falsehood motivated the plaintiff and others like him to invest.

Additionally, the complaint claims that the Tezos Foundation had pledged to use some of the funds raised toward particular ends if the token offering met certain financial goals. For example, the Foundation stated that, should the offering attain the highest bracket of performance, exceeding $20 million, it would “sponsor a leading computer science department,” “Acquire mainstream print and TV media outlets to promote and defend the use of cryptographic ledger in society,” and “Grow its team to at least 15 members,” among other things. According to the suit, the Foundation has not fulfilled any of these promises.

The complaint also asserts that despite assurances from the Breitmans that they would transfer DLS and its intellectual property holdings to the Tezos Foundation after the token offering, they have yet to do so. Gevers declined an invitation by Reuters to provide it with a contract that he alleges contains these promises by the Breitmans. To bolster the claims of malfeasance, the lawsuit notes that in June 2017, Kathleen Breitman stated that she and Arthur had chosen Switzerland as a site for the Foundation because its regulatory authority “had a sufficient amount of oversight but not like anything too crazy.” At a later date, according to the complaint, she explained that unlike under Swiss regulators, “here in the US it’s less obvious how the digital assets are registered and treated.”

The lawsuit also asserts that the fundraising event offered “time-dependent bonus[es]” that aimed “to encourage rapid contributions.”

In an article published by Reuters on October 18, Gevers claimed that the cryptocurrency brought in during the token offering was being slowly sold off and would be invested in a diverse portfolio and for various purposes, including the operation of the Tezos Foundation.