Tezos Litigation: Claims Against Swiss Foundation can be Maintained in California

Many have heard of Bitcoin and Ether blockchain cryptocurrencies. Since those currencies were introduced, there have been a succession of blockchain coin or token offerings. As we discussed earlier on this blog, more often than not, such coin/token offerings and sales are subject to regulation under federal and California securities laws. Often an initial coin offering leads to litigation, and the 2017 offering by Arthur and Kathleen Breitman, the founders and creators of Tezos, was no exception. See Tezos background story here.

The Brietman’s and their company, Dynamic Ledger Solutions, began offering the Tezos tokens in the summer of 2017. A Swiss company called the Tezos Foundation served as the issuer of the tokens and another Swiss company, Bitcoin Suisse AG, assisted purchasers during the sale. The offering succeeded in raising the equivalent of $232 million in Bitcoin and Ether from purchasers, including many who resided in the United States. By October 2017, litigation had already been filed charging that the Brietman’s and the other participants were selling securities in violation of federal securities laws. Many lawsuits were filed, and those cases are now consolidated here in California federal court. See In re Tezos Securities Litigation, Case No. 17-cv-06779 (US Dist. N.D. Cal. August 7, 2018).

One enduring question with respect to securities law — and all laws in general — is whether such laws should apply and do apply to citizens of other nations and to actions that take place in other nations. For example, with respect to the Tezos token offering, the question was whether courts here in the United States have authority — or should have authority — over the two Swiss entities involved in the Tezos offering. In early August 2018, the US District Judge ruled that one of the Swiss entities was NOT subject to the jurisdiction of the US securities laws but the other was. These kinds of cases are important for parties seeking to avoid litigation in foriegn countries or states. Furthermore, a good corporate attorney can help avoid litigating in inconvenient forum with solid and enforceable Terms of Service and contract language.

San Diego Corporate Law: Facts Related to the Two Swiss Companies

In the Tezos case, both of the Swiss companies filed motions with the judge to dismiss the case against them claiming that they — as Swiss companies — were not subject to the laws of the United States. As to Bitcoin Suisse, the judge agreed. In general, whether a foreign company is subject to jurisdiction here in the United States depends on “contacts” with the US. In the case of Bitcoin Suisse, there was no evidence that Bitcoin Suisse provided any goods or services for the Tezos sale to any US investors or had any other significant contacts with the US. As such, US law did not apply to Bitcoin Suisse and dismissal was warranted.

By contrast, the evidence showed that the Tezos Foundation had many contacts with the US including:

• Marketing for the sale was directed mainly at US investors and there was little marketing of the Tezos sale to investors living elsewhere
• The Foundation worked closely with the Breitman’s who were/are California residents
• A significant number of investors were US citizens

These contacts were sufficient for the judge to hold that US securities laws applied to the Swiss-based foundation. The judge did leave the door open for a renewed challenge later in the case if additional evidence became available.

San Diego Corporate Law: How Contract and Terms of Service Language Can Help

As noted, there are some contractual methods of avoiding having to litigate cases in far-away, inconvenient locations. These are called forum non conveniens provisions. The Tezos Foundation actually had a forum non conveniens provision in the Terms of Service Agreement for its website, but the judge held it to be non-binding since the TOS agreement was browsewrap not clickwrap. This distinction is important because with browsewrap, a website user does not have to provide affirmative assent to the terms of the agreement, which is usually a link on the webpage. Clickwrap requires affirmative consent by clicking through pop-up windows agreeing to terms. As noted, a good San Diego corporate attorney can help navigate these types of complex issues.

Contact San Diego Corporate Law

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard focuses his practice on business law, transactional, and corporate matters, and he proudly provides legal services to business owners in San Diego and the surrounding communities. Mr. Leonard can be reached at (858) 483-9200 or via email.

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