Earlier this week, the federal court in the Tezos consolidated securities class action proceeding addressed several thorny jurisdictional issues prevalent in many initial coin offerings (ICOs) made in 2017 and earlier. Over the past year, the SEC and plaintiffs in class actions have been bringing claims against parties allegedly involved in ICOs, mostly where there are allegations of fraud involved, with the primary claims based upon the sale of unregistered securities. In many of these cases, the ICOs were done in foreign jurisdictions or by foreign defendants or entities. So the interesting question that arises is this: Under what circumstances may these plaintiffs appropriately haul foreign defendants into U.S. courts to defend themselves? Several courts nationwide are now grappling with that issue, and the first decision substantively addressing those points has come down with a fair analysis heavily dependent upon the facts and allegations in the pleading.

In the putative class action involving the July 2017 Tezos ICO, which the defendants had characterized as a fundraiser for the Swiss-based Tezos Foundation, about $232 million was raised by the Foundation, with a portion going to a California husband and wife team, the Breitmans, and their company, Dynamic Ledger Solutions (DLS). The couple's home was the corporate headquarters of DLS. Other defendants included the well-known venture capitalist Timothy Draper and his firms, which made a minority investment in DLS in May 2017, and Bitcoin Suisse, a foreign firm specializing in the crypto-financial sector, which provided intermediary services for the ICO such as conversion of U.S. dollars to Bitcoin and Ethereum, the transfer of the crypto to Tezos, and the creation of digital wallets.

The defendants moved to dismiss the consolidated complaint, which alleged violations of Sections 12 and 15 of the Securities Exchange Act of 1934, on several grounds, including lack of personal jurisdiction, forum non conveniens, that they were not a "statutory" seller or that there was the improper extraterritoriality application of the courts being used for the Exchange Act claims. Only the Draper defendants and Bitcoin Suisse were successful on their motions to dismiss.

Judge Richard Seeborg had little problem finding that the Breitmans (U.S. citizens living in Northern California) as well as DLS and the Foundation (both effectively controlled by the Breitmans) purposely directed their activities for the offering and met jurisdictional due process requirements. Equally easy was dismissing the Draper defendants, as neither Draper nor his entities solicited the purchase of the tokens, as required to be a "statutory" seller. There were no allegations of face-to-face buyer-seller contact for liability to attach.

Separately, the Foundation, organized in Switzerland, as the only "seller" of the token, argued that it was an extraterritoriality application of the U.S. Supreme Court's Morrison decision, because the sale occurred in Alderney, a remote British outpost, and thus was not a "domestic transaction" for which U.S. courts should take jurisdiction. The Foundation further argued there was a forum selection clause, which made the U.S. courts forum non conveniens. However, the Court held that despite significant law enforcing such provisions, given it was based upon a "browsewrap" agreement, it would not be enforced, subject to later proof of the plaintiff's actual knowledge of the provision.

It seems that certain allegations would influence any court deciding these kinds of issues. Here, the plaintiffs alleged that the Foundation engaged in little or no marketing of the ICO anywhere other than in the United States, the Breitmans were U.S.-based, and a significant portion of the 30,000 contributors to the ICO were U.S. citizens. It will be interesting to follow the case law development as more foreign defendants are sued in U.S. courts for foreign ICOs and challenge the fling on both personal and subject matter jurisdictional grounds.

In re Tezos Securities Litigation, 17-cv-06779 (N.D. Cal.) (J. Seeborg).

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