A tsunami of ICO investor claims may result from CashBet lawsuit in U.S.

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The wheels of justice can turn awfully slowly at times, but eventually significant precedents are constructed, which can enable a torrent of lawsuits to follow where losses have been excessively harsh. Such is the case in the world of Initial Coin Offerings (ICOs), or so it seems, according to a recent court filing in the California District Court.

Ryón Nixon, a blockchain attorney, has filed a complaint on behalf of Nirvana Capital and Winslow Strong that alleges that “Mobile Gaming Technologies, Mike Reaves, George Weinberg, and Fred Hsu a) defrauded the plaintiffs and b) created and ran an Initial Coin Offering (ICO) that defied long-standing Securities and Exchange Commission regulations.” Instead of waiting for the SEC to intervene, the plaintiffs have decided that a direct approach would be far more effective.

By some estimates, ICOs have raised nearly $100 billion in the past two years from investors in the U.S. and from around the world to fund innovative projects related to blockchain technology. These funding efforts have followed a crowdfunding approach, and each varies to the extent that the offering follows any standard guidelines for disclosures and transparency. Attorneys for token issuers have relied upon protections that are specified in what is called a SAFT (Simple Agreement for Future Tokens), but the failure rate for ICOs has been astronomical, as have losses sustained by investors.

The fact that the SEC has publicly declared that all ICOs, from its perspective, are “securities” under the law, meaning that they are also “subject to specific requirements related to disclosure and registration”, has removed a major hurdle that had blocked previous lawsuits attacking SAFTs. There is already legal precedent, namely the “Howey Test”, which can be used to determine if an arrangement is an “investment contract”. The transaction is a “security” if “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”

In the CashBet case, the firm portrayed itself as “The world’s most complete crypto-ready iGaming platform… CashBet is a profitable, mobile-first iGaming platform for real money, social, and skill-based gaming.” It raised $38 million in its ICO conducted during the first part of 2018. The offering document touted “a high-profile sponsorship deal with Arsenal Football Club and claiming 4.25 million monthly active players.” The company also claimed that, “Our token is engineered to provide long-term value”.

ICO tokens do not generally convey ownership status to investors. The “profit” arises from the market’s valuation of the overall utility of the token. The CashBet token, unfortunately, plummeted from a peak value of $0.57 all the way down to $0.01. Contract language may have seemed airtight, but a legal axiom states that, “There is no defense for fraud or against the might of the SEC.” This lawsuit is alleging both fraud and the lack of SEC registration.

The defendants are ready for a fight. A spokesperson for CashBet stated:

We have reviewed the complaint entitled Nirvana Capital Limited, et al. vs. Mobile Gaming Technologies, Inc., et. al (USDC Case No. 18-cv-07483), and believe the allegations are merit-less. We intend to vigorously defend against these baseless claims and will not be commenting further at this time.

One attorney sees this case as pivotal:

The suit against CashBet, if successful, could enable the plaintiffs to rescind their purchase and receive interest and (possibly) damages as a remedy. And if successful, it will likely serve as a model for other cases – although given that the statute of limitations for rescission is just one year, investors may need to get their skates on. Perhaps more ominously for non-compliant token issuers, this may be viewed as a test case for a class action.

Can you hear the “wheels of Justice” about to turn?

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