\n By Initial coin offerings are attracting billions of dollars in financing, a growing That\u2019s a recipe for a wave of private litigation, financial services and commercial The nascent technology is drawing legal scrutiny as it becomes an increasingly popular Private lawsuits filed against token issuers or the exchanges they trade on could \u201cA successful civil claim against a token issuer for fraud or securities violations ICOs have attracted $1.6 billion in venture capital in 2017 so far, according to August The pace of initial coin offerings accelerated in the summer of 2017, when ICOs by The soaring valuations of new tokens and the major blockchain technologies underlying Those factors are attracting bad actors and artificially driving up valuations of <\/i>, D. Conn., No. 3:16-cv-00940, complaint filed <\/i>, N.D. Cal., No. 3:17-cv-01431, complaint filed <\/i>, Del. Ch., No. 2017-0652, complaint filed Increased regulatory scrutiny, including by the U.S. Securities and Exchange Commission, \u201cOnce the SEC starts getting involved, then the ball tends to start moving faster,\u201d Tokens issued by ICOs can offer consumers legitimate, innovative investments or services, Still, private investors may come after companies that commit outright fraud or breach New investors who are attracted to rising ICO values but don\u2019t have the technical \u201cThere are some really good people out there who are making useful things with blockchain,\u201d ICO investors may also file suit against companies and exchanges that\u2014even unknowingly\u2014incorrectly That means that companies and investors issuing and exchanging tokens might not be \u201cEven if there isn\u2019t outright fraud, in the securities context, if the token security The coders or entrepreneurs behind ICOs often aren\u2019t familiar with the public disclosures \u201cCompared to a traditional security, there are frequently little to no public disclosures The increased regulatory scrutiny by the SEC, the U.S. Financial Crimes Enforcement Still, fraud litigation will impact all types of tokens, not just securities, Nathalie \u201cConsumer laws exist outside of the SEC,\u201d Unhappy investors will face hurdles to suing a coin issuer or the exchanges it trades Private litigation could be thwarted because it can be hard to identify the party Coin offerings with terms of service that included arbitration provisions may also Still, attorneys and policy groups said they\u2019re expecting private lawsuits to be filed \u201cThe larger a market becomes, the more people are involved, the more money involved, To contact the reporter on this story: Michaela Ross in Washington at To contact the editor responsible for this story: \n Copyright \u00a9 2017 The Bureau of National Affairs, Inc. All Rights Reserved.<\/i>\n <\/p>\n<\/p><\/div>\n By Michaela Ross Initial coin offerings are attracting billions of dollars in financing, a growing pool of unsophisticated investors, and increased regulatory scrutiny. That\u2019s a recipe for a wave of private litigation, financial services and commercial litigation attorneys and policy researchers analysts told Bloomberg BNA. The nascent technology is drawing legal scrutiny as it becomes … <\/p>\n
\n Michaela Ross<\/a><\/i>\n <\/p>\n
\n pool of unsophisticated investors, and increased regulatory scrutiny.\n<\/p>\n
\n litigation attorneys and policy researchers analysts told Bloomberg BNA.\n<\/p>\n
\n way to raise money. Instead of selling shares of stock, as in initial public offerings,
\n more and more companies are selling digital coins or tokens in initial coin offerings
\n that can represent ownership shares, currencies, or be redeemed for a good or service.<\/p>\n
\n curtail the use of initial coin offerings, or ICOs, as well as drive new business
\n to law firms specializing in the industry\u2014both from investors seeking redress and
\n future token issuers looking to reduce legal risks through due diligence, attorneys
\n and policy groups said.\n<\/p>\n
\n may trigger a flurry of other similar suits, but each case will vary based on the
\n details of the sale,\u201d Andrew Hinkes, a dispute resolution attorney at Berger Singerman
\n LLP, told Bloomberg BNA.\n<\/p>\n
\n data on Ethereum-based ICOs from Chainalysis, a New York-based research and anti-money
\n laundering software company. The number of individual investors buying and trading
\n these coins is booming. Bittrex LLC, a popular exchange that trades about 200 types
\n of tokens, saw its user base grow from 1 million to 1.2 million in a span of two weeks
\n in August, according to its co-founder and CEO, Bill Shihara.\n<\/p>\n
\n Bprotocol Foundation and the Tezos Foundation set new records by surging past the
\n $150 million and $230 million marks, respectively. Bprotocol Foundation is developing
\n a protocol called Bancor that it says aims to allow buyers to create customized tokens
\n that can be traded against a variety of other tokens. Tezos Foundation is developing
\n an independent blockchain platform.\n<\/p>\n
\n them, such as Bitcoin and Ethereum, have drawn new investors that may not understand
\n how the tokens work, could lose money, and may not know how to recognize whether the
\n tokens should be valued as a security, cryptocurrency, or utility.\n<\/p>\n
\n some assets that, once deflated, are likely to spur private litigation against companies
\n and individuals issuing and exchanging these tokens, attorneys and research groups
\n said. Three lawsuits involving ICOs have been filed, Bloomberg Law data show, but
\n none involved investors suing initial coin offerings issuers or exchanges on which
\n they trade ( <\/p>\n
\n Audet et al v. Garza et al<\/p>\n
\n 6\/15\/16
\n , <\/p>\n
\n United States v. Coinbase, Inc.<\/p>\n
\n 3\/16\/17
\n , <\/p>\n
\n R3 Holdco LLC v. Ripple Labs, Inc.<\/p>\n
\n 9\/8\/17
\n ).\n<\/p>\n
\n will improve investor understanding of how these digital assets should be classified
\n and reveal fraudulent schemes, opening the door to litigation against companies that
\n are misrepresenting themselves or acting illegally, the groups said.\n<\/p>\n
\n Knight told Bloomberg BNA.\n<\/p>\nThe Fraud Factor<\/h5>\n
\n attorneys and policy groups said.\n<\/p>\n
\n of contract by failing to deliver tokens or misrepresenting their technology in several
\n different ways, Stephen Palley, corporate and commercial litigation attorney at Anderson
\n Kill P.C., told Bloomberg BNA. China\u2019s central bank banned all ICOs in the country
\n Sept. 4, following widespread concerns about whether some coin developers were operating
\n legally, while the SEC and Britain\u2019s Financial Conduct Authority have issued consumer
\n warnings about fraudulent and risky offerings.\n<\/p>\n
\n expertise to evaluate a scam may also drive up market values, leading to more lawsuits
\n from those who have lost money to criminal operators.\n<\/p>\n
\n Palley told Bloomberg BNA. \u201cThere\u2019s also a lot of garbage.\u201d\n<\/p>\nVirtual Identity Crisis<\/h5>\n
\n classify tokens. The evolving technologies behind the coins can make it difficult
\n to determine if a token is a security, utility, or digital currency, attorneys told
\n Bloomberg BNA.\n<\/p>\n
\n in compliance with either securities or money services business regulations, such
\n as SEC registration and investor disclosure requirements; state money transmitter
\n licensing laws; and anti-money laundering rules.\n<\/p>\n
\n was issued not in accordance of the law, the investor has the right of rescission,
\n which is the right to unwind this transaction with the company,\u201d Brian Knight, a senior
\n research fellow at the Mercatus Center at George Mason University, told Bloomberg
\n BNA.\n<\/p>\n
\n required of companies soliciting investors.\n<\/p>\n
\n made to potential investors,\u201d
\n Hinkes told Bloomberg BNA. \u201cThese disclosures are there to protect consumers, and
\n these ICOs typically don\u2019t come within a mile of disclosure that would be required
\n in a securities offer,\u201d
\n Hinkes said.\n<\/p>\n
\n Network (FinCEN) and other agencies since July has already lead to more new ICOs taking
\n legal due diligence steps, Hinkes said. But the rising attention from regulatory bodies
\n will also likely spur individual investors to take a closer look at what they\u2019ve already
\n bought and potentially file lawsuits, Knight added.\n<\/p>\n
\n Salami, a blockchain attorney with Fintech Portfolio, which helps companies offer
\n compliant ICOs, told Bloomberg BNA. Issuers of utility coins selling future access
\n to a product or service, such as a set amount of cloud storage, could fail to deliver
\n their product or misrepresent it, she said.\n<\/p>\n
\n she said.\n<\/p>\nLitigation Roadblocks<\/h5>\n
\n on.\n<\/p>\n
\n to sue, Hinkes said. Many coin platforms are established as open-sourced technologies
\n under a foundation or non-profit framework, and not as companies, attorneys told Bloomberg
\n BNA. The global nature of the technology and its developers also means it could be
\n tough to establish that a particular court has jurisdiction to hear a case, they said.\n<\/p>\n
\n be able to skirt litigation, Hinkes said.\n<\/p>\n
\n when valuations of coins\u2014either legitimate or fraudulent\u2014eventually tumble and investors
\n begin losing money and scrutinizing what they purchased.\n<\/p>\n
\n the more likely you have litigation,\u201d Palley said, adding \u201cPeople lose money, then
\n sue.\u201d\n<\/p>\n
\n mross@bna.com<\/a><\/p>\n
\n Keith Perine at
\n kperine@bna.com<\/a><\/p>\n
\n
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