The ICO Scene
ICOs have been all the rage in 2017, with $1.4 billion raised in funding this year, but how many are earnest projects with a legitimate value proposition and how many are outright scams? To what level are investors informed?
If you were to listen to the men behind Ethereum and Ripple, most ICOs are fraudulent and copycats of existing value propositions, taking advantage of a gray area while regulatory authorities catch up with the ecosystem.
According to Brad Garlinghouse, CEO of Ripple, “I think a lot of what's happening in the ICO market is actually fraud, and I think that will eventually stop. There are a lot of really fabulous things that get done with digital assets and blockchain technologies to reduce friction, to reduce costs, and enable things that weren't possible before. I think instead of focusing on those, we're distracted by what's going on in this gray area.”
“With China's political approach to things, and with the fraud that was rampant there, it made a lot of sense for them to pause things a little bit and get a better, deeper understanding of the ecosystem, and scare potential fraud perpetrators,” said Joseph Lubin, co-founder of Ethereum. He added that regulators needed to wrap their head around the details of how the technology works and “rationalize what it offers compared to what the current rules are.”
The catching up of regulatory intervention may not be very far off. The US Securities and Exchange commission(SEC) is tasked with enforcing securities law. Although no formal regulatory measures have been undertaken, SEC chairman, Jay Clayton, has previous expressed concern that ICOs may be exposing buyers to fraud and outlined and intention to police activities around ICOs, stating that token offerings could be deemed as securities in some instances.
Sara Hanks, CEO of CrowdCheck, a consultancy assisting entrepreneurs and investors with crowdfunding campaigns fires a shot across the bow for ICOs, “We know of a number of plaintiffs' lawyers around the country who are just basically collecting lists of ICOs and going ‘Hmm, I'm going to sue these people.”
“The ICO most appealing to a plaintiff lawyer would be large in terms of total money raised, have a strong U.S. nexus, would have promoters and participants in the ICO who are U.S.-based, and the tokens that it would issue would reflect a claim on the share of the company’s future revenue. Tezos checks a lot of those boxes,” warned Joel Fleming of Block & Leviton
Duly, earlier this week, Tezos, one of the most successful blockchain technology projects which raised $232 million in July, was hit with a second class-action lawsuit in a blow for its founders, Arthur and Kathleen Breitman.
Tezos outlined a project to build a blockchain with a revolutionary governance model capable of modifying its own rules, seeking to break away from the proof of work model that has had its limitations laid bare in the last couple of years. Engulfed in a legal conflict with Johann Gevers, a swiss engineer whom they picked to lead the Tezos project, the Breitmans haven’t launched the network as of yet.
SEC argues that the ICO violated US securities law, which requires companies to register with the SEC before offering securities to the public. With launch of the proposed network being long overdue, anxious investors are left to ponder if anything would materialize of their investment.
The lawsuits against Tezos charge the Breitmans misled investors about when the network would be launched. In a blog post in May 2017, Breitman wrote, “all functionalities from the whitepaper have been implemented… the big remaining tasks are finishing a security addition, optimizing smart-contract storage and testing our network on a large scale and performing security audits.”
A Donation From Investors?
Six months later, Breitmans claim that the network launch is a further 3 months away at the earliest. US law requires anyone offering stock to the public to register with the Securities and Exchange Commission. The Breitmans did not do that. Instead, they tried to skirt those requirements by describing investors' purchases as ‘donations’ to the Tezos Foundation. The lawsuit however argues that this was a sham.
Disgruntled investors in the Tezos project aren’t hanging around for SEC to crack the whip. They’re filing lawsuits on their own bases on the allegation that the project violated SEC laws. If the Breitmans were to lose the lawsuit, they could be forced to reimburse the money raised in the crowdsale.
With Tezos being one of the most successful ICOs in 2017, the lawsuit could have seminal implications in the ICO scene as a whole given that most ICOs do not register with the SEC, while several ICOs offer tokens on platforms which are hitherto non-existent. The result could put heightened pressure on the SEC to act on other ICOs.
Although Breitmans’ attorney refused to comment on the matter, they have previously denied any wrongdoing and averred to fight back any potential lawsuits.