Investors in cryptocurrency platform Block.one have filed a class action complaint for violations of the Securities Act of 1933 and the Exchange Act of 1934. The suit was brought by investors who purchased EOS Tokens. Block.one is accused of engaging in a “fraudulent scheme,” which allegedly misled and deceived investors and has caused them to lose money.
The plaintiffs, Crypto Assets Opportunity Fund and Johnny Hong, alleged that Block.one did not register the EOS tokens as required by federal securities law. They also alleged that the securities were issued “pursuant to materially false and misleading prospectus,” and that they “disseminating materially false and misleading statements concerning the EOS Securities during the Class Period.”
Specifically, the plaintiffs said “[t]his case arises out of a fraudulent scheme, fueled by a global frenzy over cryptocurrencies and unchecked human greed, to raise billions of dollars through sales of a cryptocurrency called EOS – an unregistered security – to investors in violation of the United States federal securities laws.” They said the defendant made materially false and misleading statements about EOS, “which artificially inflated the prices for the EOS Securities and damaged unsuspecting investors.” Block.one claimed it would “develop software to run a new highly decentralized blockchain.” To fund developing this software Block.one created a plan to sell EOS securities in an initial coin offering (ICO). The defendant allegedly wanted to create “a new blockchain architecture designed to enable vertical and horizontal scaling of decentralized applications.” Block.one heavily marketed EOS, and began its ICO in June 2017, targeting both wealthy investors and the public.
Block.one “kept 10 percent of the EOS Securities for itself and solicited online exchanges of digital assets… to lists EOS Securities on their platforms and encourage purchases by a wide universe of investors.” Block.one provided an “EOS Purchase Agreement” in these transactions, however, according to the plaintiffs, this does not meet the requirements for a registered securities offering, and the EOS Securities did not qualify for an exemption to these requirements. The plaintiffs said because the defendant did not provide a registration statement it “did not provide critical information to purchasers of EOS Securities, such as information about Block.one’s financial condition, future plans of operation and budget, the proposed uses of investor proceeds, and detailed disclosures of material trends and the most significant factors that made the ICO speculative and risky.”
The plaintiffs alleged Block.one made multiple materially false and misleading statements, both before and after the ICO, inflating the price of EOS. “The false statements concerned the capabilities of the anticipated EOSIO software that Block.one was developing, including in particular its ability to support a ‘decentralized’ blockchain.” However, these claims were false, according to the plaintiffs; it was revealed that the “EOS Blockchain was highly centralized and was not superior to the other blockchains already in use.” Block.one raised more than $4 billion from investors through the sale of EOS Securities.
When EOS Blockchain launched, there were allegedly several issues; for example, users found a bug that caused glitches, which forced Block.one to use an earlier version of the code. Other problems emerged shortly after, such as users discovering it was not “decentralized” as the company promised and several investor accounts were frozen. An outside company tested the EOS software and stated that “EOS is not a blockchain…rather [it is] a distributed homogenous database management system” because the transactions were not “cryptographically validated.” Additionally, the “foundation of the EOS system is built on a flawed model that is not truly decentralized.”
In September 2019, the Securities and Exchange Commission (SEC) issued a cease and desist order to Block.one because of its securities violations. The SEC stated that these were “securities when issued and should not have been sold (and should not continue to be sold) without SEC registration or pursuant to an exemption from registration.” Afterward, the price of EOS drastically declined “from a high of $22.89 on April 29, 2018 to a trading price of $2.66, as of” May 18.
The plaintiffs have sought certification as a class action. The complaint was filed in the Southern District of New York. The plaintiffs are represented by Grant & Eisenhofer.