Tezos Class Action Progresses Beyond the Motion to Dismiss Stage

Blockchain & E-Transactions Law

Earlier this month the United States District Court for the Northern District of California issued its opinion denying several motions to dismiss, including one filed by the Tezos Foundation, regarding class allegations stemming from Tezos' July 2017 initial coin offering ("ICO"). This lawsuit, In Re Tezos Securities Litigation (3:17-cv-06850), is a consolidated class action resulting from an ICO conducted by Tezos in July of 2017 in which the plaintiffs, investors in the ICO headed by lead plaintiff Arman Anvari, seek rescission of their contributions to the ICO as well as damages under the Securities Exchange Act of 1934 (the "Exchange Act").

While the opinion addresses several arguments, of particular note, is the Court's analysis of the Exchange Act's application to the ICO. The Tezos Foundation argued that with respect to Anvari, the ICO occurred in Alderney, one of the Channel Islands, both due to the fact that terms of the ICO (the "Contribution Terms") identified Alderney as the legal site of all of the ICO transactions and because the Tezos Foundation's software resides in Alderney. As such, the Tezos Foundation argued, the extraterritorial application of the Exchange Act was improper.

The Court rejected both arguments made by the Tezos Foundation. In doing so, the Court identified several allegations indicating that the ICO at issue was a transaction that occurred within the United States. First, Tezos' website was hosted by a server located in Arizona. Second, the website was run by a co-defendant in California. Third, Anvari presumably learned of the ICO due to marketing efforts that almost exclusively targeted United States residents. And, fourth, "[plaintiff's] contribution of Ethereum to the ICO became irrevocable only after it was validated by a network of global 'nodes' clustered more densely in the United States than in any other country." In reviewing the totality of the factors, the Court determined that such factors supported the inference that the alleged securities purchase occurred within the United States. While only one of multiple factors, the Court's identification of the location of the nodes (the participating computers that collectively verify the data in each transaction before a block in a blockchain is created) on the Tezos blockchain suggests that node location and density could be an important consideration in determining the applicability of the Exchange Act to other blockchain-based digital currencies.

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