Balestra v. ATBCoin LLC, No. 17-cv-10001 (S.D.N.Y. Mar. 31, 2019) [Link]
Summary: ATBCoin marketed itself as an innovative new cryptocurrency. Plaintiffs claim that ATBCoin fraudulently marketed unregistered securities. ATBCoin challenges jurisdiction and the claim. The Court finds jurisdiction and a plausible claim.
- ARBCoin marketed its new cryptocurrency as “the fastest blockchain-based cryptographic network in the Milky Way galaxy,” capable of delivering “blazing fast, secure and near-zero cost payments to anyone in the world. Based on its marketing materials, “participants in the ICO expected the value of the ATB Coins they purchased to increase as more users adopted the ATB Blockchain.”
- “Defendants launched the ATB Blockchain on September 14, 2017 at the close of the ICO; however, the blockchain is not capable of the technological feats Defendants advertised.”
- “Defendants did not file a registration statement for the ATB ICO with the SEC at any point, either before, during, or after the ICO.”
Issues, Holdings, and Discussion:
- Does the Court have jurisdiction? Yes:
Plaintiff’s claims arise under the Securities Act, which authorizes nationwide service of process. See 15 U.S.C. § 77v(a) (permitting service “in any [judicial] district of which the defendant is an inhabitant or wherever the defendant may be found”). When a civil case arises under federal law and a federal statute authorizes nationwide service of process, courts often consider “contacts with the United States as a whole” as the “relevant contacts for determining personal jurisdiction.” In re Platinum & Palladium Antitrust Litig., No. 1:14-cv-9391-GHW, 2017 WL 1169626, at *40 (S.D.N.Y. Mar. 28, 2017) (internal quotation marks omitted)[.]
. . . .
Plaintiff has provided ample evidence that both Ng and Hoover targeted the U.S. market in an effort to promote the sale of ATB Coins, the very unregistered security at issue in this litigation. . . .
In sum, Hoover’s residence in New York (thereby making the United States his place of domicile), Hoover’s and Ng’s management of a business based in the United States, and their participation in conferences in the United States aimed at promoting the ATB Coin to United States investors clearly demonstrate that both Hoover and Ng “purposefully avail[ed themselves] of the privilege of conducting [business] activities within” the United States with respect to the ATB Coin and its corresponding ICO. Burger King, 471 U.S. at 475 (internal quotation marks omitted).
2. Is ATBCoin a security? Yes:
Both parties agree that Howey governs the determination of whether ATB Coin constitutes a “security,” (see Defs.’ Br. 7-8; Pl.’s Opp. 5), and Defendants do not dispute that the first prong of the test—i.e., an investment of money—is satisfied here, where Plaintiff exchanged 2.1 ETH for 388.5 ATB Coins, (see Compl. Ex. 1).
. . . .
A plaintiff may demonstrate a common enterprise by pleading the existence of “horizontal commonality.” Revak v. SEC Realty Corp., 18 F.3d 81, 87 (2d Cir. 1994). In an enterprise marked by horizontal commonality, “the fortunes of each investor in a pool of investors” are tied to one another and to the “success of the overall venture.” Id.(internal quotation marks omitted). . . . [T]he funds raised through the ICO were pooled together to facilitate the launch of the ATB Blockchain, the success of which, in turn, would increase the value of Plaintiff’s ATB Coins. Cf. Zaslavskiy, 2018 WL 4346339, at *6 (finding horizontal commonality in case involving two “virtual currency investment schemes” where it could “readily be inferred from the facts alleged that [defendant’s] investment strategies depended upon the pooling of investor assets to purchase real estate and diamonds”).
. . . .
The third prong of the Howey test is satisfied where investors have been “led to expect profits solely from the efforts of the promoter.” United States v. Leonard, 529 F.3d 83, 88 (2d Cir. 2008) (quoting Howey, 328 U.S. at 299). The Second Circuit has established that “the word `solely’ should not be construed as a literal limitation; rather [courts] consider whether under all the circumstances, the scheme was being promoted primarily as an investment.” Id. (internal quotation marks omitted)[.]
. . . .
The Complaint satisfactorily pleads that the success of ATB Coins was entirely dependent on Defendants’ following through on their promise to launch and improve the ATB Blockchain. As the Complaint alleges, “the value of ATB Coins was expected to rise from the speed of transactions on the ATB Blockchain that was promoted as `the fastest blockchain-based cryptographic network in the Milky Way galaxy.'” (Compl. ¶ 42 (quoting 4/27/18 Kupka Decl. Ex. 2, at 1).) When the ATB Blockchain failed to deliver the groundbreaking technology that Defendants touted, users did not adopt it and the value of the ATB Coins plummeted. (See id. ¶¶ 36, 42 (“Given that the ATB Blockchain is not capable of such feats and has generally not been adopted or successful, ATB Coins have minimal value.”).)
Although Defendants argue that ATB Coin purchasers “had complete control over [their ATB] coins as soon as they were purchased, including the decisions of when and for how much to sell,” (Reply Br. 7), purchasers had no control over whether the new ATB Blockchain technology worked. See Zaslavskiy, 2018 WL 4346339, at *7 (“Though [defendant] suggested that  investors could trade [digital] coins on an external exchange and make more profit, there is no indication that investors were to have any control over the management of [defendant’s business].”); see also Munchee, 2017 WL 10605969, at *7 (finding that “[i]nvestors had little choice but to rely on Munchee and its expertise” to generate profits because, “[a]t the time of the offering and sale of MUN tokens, no other person could make changes to the Munchee App or was working to create an `ecosystem’ to create demand for MUN tokens”). The failure of that technology was likely to—and, in fact, did—render ATB Coins undesirable, regardless of the individual purchaser’s “business skills.” (Compl. ¶ 35.)
- A useful reminder about the long arm of the federal securities laws and one further data point supporting the now broadly accepted conclusion that many crypto projects are investment contracts.