The Block is delighted 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. Their analysis, Crypto Caselaw Minute, is below.
This week’s CCM looks at a company that may have violated its own terms and conditions, gives an update on Ripple jurisdiction jockeying, and talks typos, trenches and ICOs. (As always, Rosario summaries are “NMR” and Palley summaries are “SDP”.)
Disclaimer: These summaries are provided for educational purposes only by Nelson Rosario [twitter: @nelsonmrosario] and Stephen Palley [twitter: @stephendpalley]. 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. (Picture credit: pixabay; CC0 Creative Commons)
[related id=1]Actus Fund, LLC and EMA Financial, LLC v. Sunstock, Inc., (D. Mass, 1:18-cv-12568, Doc. 1, 12/13/18) [SDP]
Are spelling errors and improbable claims in marketing materials a sign that an investment idea might be more fluff than stuff? Put differently, if something sounds too good to be true does that mean that it probably is?
This new lawsuit filed in Massachusetts federal court alleges a long series of misrepresentations made by a company that the plaintiffs invested several hundred thousand dollars into, culminating in claims about an ICO that the plaintiffs say they never agreed to allow their investment to be used for.
It’s a very long complaint with numerous causes of action, including federal and state securities claims, common law claims and an unfair trade practices count for good measure. Several alleged material misrepresentations are at issue:
* That the defendant had plans to build a “recession based portfolio” with “plans to divest up to half of its cash proceeds in SILVER BULLION”
* That defendant fraudulently claimed that it had launched a “Rehabilitation Housing Division”
* That it planned to “acquire a portfolio of undervalued real estate using an exciting and novel combination of stock and crowdfunding based financing.” Specifically (and in underlined italics, for emphasis) Defendant stated that “[t]o achieve the Company’s objectives, Sunstock, Inc. is seeking $20.9 million in total funding in 5 trenches.” (Yes, trenches. Not tranches. Which suggests that no lawyer ever read that language).
* that instead of buying real estate or silver, the Defendants decided to invest “time, energy and the Plaintiffs’ money in ‘Triple 8’ crypto tokens.”
Per the lawsuit, the defendant described Triple 8 as “a user friendly and valid monetary system. Redefining how the world uses and understands money flows, the launch of ‘Triple 8’ as asset-back [sic.] crypto currencies, tied to gold, silver and platinum bullion provides real world value, not seen since the loss of the U.S. dollar monetary gold standard.” The lawsuit quotes press releases by defendant saying that after “months of due diligence” the defendants had decided to run an ICO using a company called Flashmoni to raise $10 million and naming an “internationally acclaimed blockchain strategist” as an advisor to management.
[related id=2]Plaintiffs say that the planned ICO was a terrible use of loan money, a securities transaction that they never agreed to be a part of. While we have to read through the lines to figure this out, it seems like part of the impetus for this lawsuit is the fact that the Defendant defaulted on loan payments, which caused a default. It could be that this caused them to scrutinize the defendant more closely and become worried that they were associated with an ICO.
Lessons to be learned here? If someone offers you a chance to invest in an investment “trench” probably stay away unless it has something to do with a sewer system. I also suspect that is not the last time we will see ligation over a token offering that claimed to put precious metals on a blockchain.
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