Investors Filed 11 Securities Violation Suits

While most of the world was locked down, the preverbal shoe (litigation) finally dropped on Crypto companies that raised money through the sale of digital assets which are alleged to be illegal, unregistered securities offerings. That is, unless the plaintiffs are time-barred under the statute of limitation.

On Friday April 3, 2020, in what may someday be known as The ICO Bust-up, the Digital Asset Dust-up, the Great Strike, (or some other amalgamation of words weighted with historic import) investors filed 11 lawsuits in the Southern District of New York against a broad array of issuers and exchanges for allegedly offering and selling unregistered securities in violation of both federal and state securities laws during the ICO boom of 2017 and 2018.

These lawsuits, filed by two high-profile plaintiff litigation law firms, seek billions of dollars in damages against a number of well-known crypto-companies. The lawsuits accuse these issuers and exchanges of selling digital assets without (i) registering with federal or state regulators or (ii) an applicable registration exemption. The cases also contend that crypto-trading platforms benefited financially from listing these illegally offered securities. For example, a lawsuit against one crypto-trading platform, alleges that the platform collected cash fees from issuers, sometimes exceeding $1 million, to list their digital assets.  The investors also allege that, in addition to selling unregistered securities, crypto-trading platforms manipulated the cryptocurrency markets for their own benefit.

These lawsuits highlight the dangers to issuers and exchanges in the sale of unregistered digital assets, particularly where the disclosures may be misleading or inadequate. While the suits are in their infancy, and the defendants have not yet raised any defenses, some argue these suits were filed outside of the applicable statute of limitations period.  Ordinarily, the statute of limitations is one year from discovery of the violation but no more than 3 years after the offering for claims under the 1933 Securities Act.  However, because the structure of many offerings included a long delay from the time that the alleged securities were offered until the digital assets were issued, plaintiffs are likely to argue that the three year limitations period should begin with the issuance of the digital assets rather than the offer date, based on a doctrine called “integration.”

Expect the defense to vigorously oppose the complaints on both procedural and meritorious grounds.  While the outcome of these litigations, as with any, are not certain, given the substantial number of ICOs and issuances in the last 3 years, one thing is certain: the industry will be watching these cases closely.

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