Securities Regulation Daily Tezos blockchain promoter dismissed for lack of personal jurisdiction; venture capitalist not a ‘direct seller’
Wednesday, September 4, 2019

Tezos blockchain promoter dismissed for lack of personal jurisdiction; venture capitalist not a ‘direct seller’

Motion to quash granted as to Swiss-based Tezos Foundation despite the fact that they operated a website that accepted money from California residents. California venture capitalist who was signatory to Tezos Foundation agreement and who actively marketed XTZ tokens merely assisted in solicitation efforts.

The Superior Court of California has handed down two rulings affecting the putative class action brought against Tezos Foundation, the Swiss-based promoter of Tezos blockchain tokens (XTZ). The state class action—which parallels a federal class action over the ICO—claimed liability arising from the sale of digital currency worth $230 million at the time of sale, asserting that the defendants sold unregistered securities. The court granted the motion to quash filed by the Tezos Foundation, finding that the California court was without personal jurisdiction over that entity. The court also granted the demurrer of the California venture capitalist who entered into an agreement with the foundation (Tezos ICO Cases, August 28, 2019, Jackson, T.).

Sales of ‘Tezzies’. The putative class action was brought against multiple defendants who allegedly promoted, sold, and solicited the unregistered sale of XTZ blockchain tokens, also known as "Tezzies." The lead plaintiff purchased XTZ tokens during the initial coin offering (ICO) on July 27, 2017 when 607 million XTZs were sold in exchange for digital currency worth over $230 million. The complaint alleged that the tokens were offered and sold without SEC registration in violation of 15 U.S.C. § 771(a)(1), and 15 U.S.C. § 77o (the Securities Act.) The defendant, Tezos Stiftung (the Foundation), specially appeared to quash personal jurisdiction, which for the reasons cited below, the court granted.

ICO promoters. The complaint alleged that various individuals, along with the entity Dynamic Ledger Solutions, Inc. (DLS) created the Foundation and conducted the Tezos ICO, and that California residents controlled and directed the actions of the Foundation in the time prior to and during the Tezos ICO. The Foundation countered that no facts alleged formed the basis for personal jurisdiction over it. The court began its analysis by noting that personal jurisdiction under California’s long-arm statute allows the state to exercise personal jurisdiction under any basis not inconsistent with California’s Constitution or that of the United States, but that the plaintiff was required to show that the Foundation purposefully availed itself of forum benefits with respect to the matter in controversy, and that the controversy was related to, or rose out of, the Foundation’s contacts with California. Jurisdiction over the Foundation needed to be based on an analysis of the relationship between the Foundation and the forum state.

Accepting money through website. The plaintiff argued that the court should exercise personal jurisdiction over the Foundation because it operated a website that accepted money from Californians, and because the Foundation was created by and for the benefit of the California-based DLS defendants. However, the court found that under California law, the act of placing information on the internet was not sufficient, by itself, to subject the Foundation to personal jurisdiction in the state in which the information was accessed; rather, there had to be a showing that the Foundation intended to direct its website content to the forum state audience. The court found that no such evidence was presented, and the motion to quash of the Foundation was granted.

Venture capitalist as signatory. The court also heard the demurrer motion filed by a California venture capitalist who invested $1.5 million (a 10 percent stake) in DLS, the company that controlled the Tezos source code. The venture capitalist was also a signatory to DLS’s agreement with Tezos Foundation. Following its 10 percent acquisition, the venture capitalist actively marketed XTZ tokens and the Tezos ICO to prospective purchasers, including the plaintiff.

Notwithstanding that conduct, the court ruled that liability under Section 12 of the Securities Act can be imposed on a person who successfully solicits the purchase of unregistered securities, but that such liability does not extended to persons who merely assist in another’s solicitation efforts. Where a Section 12 defendant is not a direct seller, many courts have required an allegation of direct and active participation in the solicitation and immediate sale of the securities to the plaintiff.

For the foregoing reasons, service on the Foundation was quashed due to lack of personal jurisdiction, and the venture capitalist was dismissed as a defendant.

The case is No.: CJC-18-004978.

MainStory: TopStory Blockchain FraudManipulation SecuritiesOfferings CaliforniaNews

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