SAFTs, securities and alleged misrepresentations

Quick Take

  • Fasulo et al. v. Xtrade Digital Assets Inc.
  • Plaintiffs invested $2.5 million in a SAFT and now seek to rescind their (alleged) investment contracts and to recover money damages
  • The token, which had been advertised for issuance at 10 cents, and which had a contractual value of 10 cents as prescribed in the SAFT contract, began trading on these exchanges at under 1 penny in price
  • “Right from the beginning, in a direct attempt to circumvent U.S. securities laws, Defendants refused to execute investment contracts with U.S. investors until a foreign national could be found whose name could be substituted on the contract.”

Disclaimer: These summaries are provided for educational purposes only by Nelson Rosario and Stephen Palley. They are not legal advice. These are our opinions only, aren’t authorized by any past, present or future client or employer. Also we might change our minds. We contain multitudes.

As always, Rosario summaries are “NMR” and Palley summaries are “SDP".

[related id=1]Fasulo et al. v. Xtrade Digital Assets Inc., S.D. Fl., 4/29/19, 1:19-cv-03741 [SDP]

Another day, another lawsuit in federal court in the Southern District of New York alleging multi-million dollar violations of the Securities Act of 1933, the Exchange Act of 1934, and common law fraud, all arising out of a 2017 token sale utilizing a so-called SAFT agreement. (As a reminder, allegations in a lawsuit are just that — unproven claims — by describing the allegations I am not saying they are true, just summarizing what this publicly filed lawsuit says).

According to the Plaintiffs, in 2017 they were presented with a token purchase offer in which they would buy tokens “in bulk, at a substantial discount to the intended public issuance price, and then resell them at that issuance price or better.” Defendants said that SEC registration wasn’t required “since the tokens were for use in the platform, not for trading themselves.” [Ah yes, the old utility token dance.] Between the two of them they invested approximately $2.5 million and are now suing over that investment.

Plaintiffs say that tokens were described in a series of five whitepapers: “The initial versions of the Whitepapers explained that XDA’s ultimate mission and the purpose of the Offering was to help cryptocurrency traders access multiple cryptocurrency exchanges more quickly, cheaply and knowledgeably than the traders could do on their own. XDA would do this through the ‘Xtrade Platform’ (the ‘Platform’), basically a computer program, with a ‘market-making’ function.”

Anyways, plaintiffs say that they now realize the whole dang thing was really-o and trulio an UNREGISTERED SECURITIES OFFERING and SHOULD HAVE BEEN REGISTERED! Also, the defendants allegedly changed the offering terms by (1) abandoning the platform they said the tokens were going to be used on and (2) deciding to use cash instead for the rest of their trading platform. Per the Complaint, “This was not only fraudulent in itself, it also meant that without any secondary purpose, the tokens were now nothing but securities and were required to be registered.” Also, “right from the beginning, in a direct attempt to circumvent U.S. securities laws, Defendants refused to execute investment contracts with U.S. investors until a foreign national could be found whose name could be substituted on the contract.”

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Plaintiffs seek to rescind their (alleged) investment contracts and to recover money damages. The corporate defendants are Xtrade Digital Assets, Inc. (“XDA”), a Delaware corporation and Xtrade Digitial Holdings (“XDH”) a Cayman corporation. Also named are XDA’s CEO, CTO and COO, all of whom are residents of New York. While XDA was promoted as the entity operating the platform and raising money, “[p]otential investors were sent a SAFT investment contract with payment instructions. The SAFT alleged that the Offering was registered by XDH under regulation 506(d) as an exempted security. XDH was also the SAFT signing entity.”

According to Plaintiffs they were told a bunch of things that weren’t true — that XDA had partnered with the Chicago Mercantile Exchange, that there was a working prototype, that it would employ legal and compliance teams to ensure regulatory and legal compliance.

Then, what I suspect is the kicker — the value of tokens allegedly dropped after being listed on two unregistered offshore exchanges under the ticker symbol “XTRD”: “The token, which had been advertised for issuance at 10 cents, and which had a contractual value of 10 cents as prescribed in the SAFT contract, began trading on these exchanges at under 1 penny in price and plummeted to to less than 1/10th of 1 penny with no significant volume … The token value is so low, Xtrade is no longer even theoretically able to generate sufficient revenue from the accepting the token in exchange for use of its potential future trading platform.”

People rarely sue when they are *making* money. Once the plaintiffs saw that the tokens were worthless, they asked for their money back and, having gotten a big fat "no" in response, filed this lawsuit.


The Block is pleased to bring you expert cryptocurrency legal analysis courtesy of Stephen Palley (@stephendpalley) and Nelson M. Rosario (@nelsonmrosario). They summarize three cryptocurrency-related cases on a weekly basis and have given The Block permission to republish their commentary and analysis in full. Part II of this week's analysis, Crypto Caselaw Minute, is above.


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