On August 7, Judge Richard Seeborg of the U.S. District Court for the Northern District of California denied in part a motion to dismiss (the “Order”) sought by the defendants in In Re Tezos Securities Litigation (the “Tezos Case”). Among other important insights, the Order’s reasoning illustrates the potentially broad reach of the U.S. federal securities laws to blockchain token sellers outside the United States.
Factual and Procedural Background
The Tezos Case arises out of the Tezos blockchain project’s token sale (“Token Sale”), which commenced in July 2017 and raised the equivalent of $232 million in Bitcoin and Ether from purchasers, including many who resided in the United States. In October 2017, token purchasers brought lawsuits against various project participants claiming that the tokens were sold as unregistered securities. In March 2018, the lawsuits were consolidated into a single putative class action, the Tezos Case, in the U.S. District Court for the Northern District of California. The defendants included Arthur and Kathleen Breitman, the founders and creators of Tezos, and their company, Dynamic Ledger Solutions (collectively, the “DLS Defendants”); the Tezos Foundation, a Swiss nonprofit organization that served as the issuer during the Token Sale; Bitcoin Suisse AG, a Swiss organization that assisted purchasers during the Token Sale; and Timothy Draper, an early investor in Tezos.
The Motion to Dismiss
The defendants each moved to dismiss the Tezos Case on one or more of the following grounds: (1) lack of personal jurisdiction; (2) forum non conveniens; (3) improper extraterritorial application of the Securities Exchange Act of 1934 (the “Exchange Act”); (4) failure to plead “statutory seller” liability under Section 12 of the Exchange Act; and (5) failure to plead “control person” liability under Section 15 of the Exchange Act.
Order on the Defendants’ Motion to Dismiss
Judge Seeborg refused to dismiss the DLS Defendants and the Tezos Foundation. But, he did dismiss Bitcoin Suisse for lack of personal jurisdiction and Timothy Draper because the complaint contained no facts showing that he was a statutory seller or control person.
Bitcoin Suisse and the Tezos Foundation—the two Swiss entities—both argued that the court lacked personal jurisdiction over them, but only Bitcoin Suisse was successful. In assessing Bitcoin Suisse’s contacts with the United States, Judge Seeborg relied on Bitcoin Suisse’s uncontradicted evidence that it had not provided services for the Token Sale directly to any U.S. investors. As a result, Judge Seeborg dismissed Bitcoin Suisse from the action.
The Tezos Foundation, on the other hand, had sufficient contact with the United States. In arriving at this determination, Judge Seeborg emphasized that, even though the Tezos Foundation was a Swiss entity, (1) the California-based Breitmans were the “de facto U.S. marketing arm of the Tezos Foundation”; (2) the Tezos Foundation “engaged in little to no marketing” of the Token Sale “anywhere other than in the U.S.”; and (3) “accordingly significant portions” of the Token Sale contributors were U.S. citizens. Notably, Judge Seeborg remarked that a “different conclusion might be warranted” if the plaintiff “were one of a small number of well-informed Americans who managed to learn about and participate in an ICO exclusively marketed in some foreign country.” But in this case, the Tezos Foundation had encouraged U.S. persons to participate in the Token Sale and “made it easy for them to do so.”
Forum Non Conveniens.
The Tezos Foundation next insisted that the suit should be dismissed in favor of Switzerland as a more convenient forum. Moreover, the Token Sale terms named Switzerland as the venue for all Tezos-related litigation.
While courts typically balance various private and public factors when weighing a forum non conveniens motion, a valid forum-selection clause generally controls except under exceptional circumstances. The Tezos Foundation therefore argued that, under U.S. Supreme Court precedent, the forum-selection clause required dismissal. But Judge Seeborg found that the forum-selection clause was not even enforceable in the first place. He highlighted the difference between a “browsewrap” agreement, where user assent is inferred by visiting the website, and a “clickwrap” agreement, where user assent specifically requires engagement with the website in a way to establish assent to the terms (typically by checking a box on the website). Finding the Token Sale terms consistent with a “browsewrap” agreement, the judge concluded that the Token Sale website failed to place users on inquiry notice of the agreement’s terms, and thus was not binding.
Without a valid forum-selection clause, the judge turned to a traditional forum non conveniens analysis and easily concluded that the relevant factors weighed against dismissal because the “vast majority” of evidence, litigants, and other practical efficiencies were present or most easily accessible in the United States. Notably, the judge denied the motion without prejudice, stating that the Tezos Foundation could renew the motion if facts unearthed in discovery warranted it.
The Tezos Foundation further argued that the Exchange Act did not apply to the Token Sale because, under Morrison v. National Australia Bank Ltd., the Supreme Court held that certain provisions of the Exchange Act regulate only domestic transactions, and under the terms of the Token Sale, all transactions took place in Alderney in the Channel Islands. Whether a transaction is domestic or foreign depends on where a transfer of title or instance of “irrevocable liability” to purchase or pay for a security occurred. Judge Seeborg focused on the “actual” rather than the “contractual” situs of the Token Sale transactions and outlined the key question as follows: “[W]here does [delivery of] an unregistered security, purchased on the internet, and recorded ‘on the blockchain,’ actually take place?” He then enumerated several factors that, taken together, supported an inference that the actual situs of the transaction was the United States: (1) the Token Sale website was hosted in Arizona; (2) the website was run primarily by Arthur Breitman in California; (3) the plaintiff presumably participated in the sale in response to marketing that almost exclusively targeted United States residents; and (4) the purchaser contributions were validated, rendering transactions irrevocable, by a network of global nodes clustered more densely in the United States than in any other country. Therefore, Judge Seeborg concluded that the Exchange Act applied.
Statutory Seller and Control Person Arguments.
Judge Seeborg dismissed Timothy Draper, finding that the plaintiff had failed to allege that Draper was a “statutory seller” who actually solicited the plaintiff’s purchase, because the plaintiff had not alleged that he was even aware of Draper’s involvement in the Token Sale. Moreover, the plaintiff failed to plead that Draper was a “control person” having day-to-day interactions with the Tezos project. The DLS Defendants, on the other hand, unsuccessfully raised similar arguments.
The Order provides insight into the broad reach of U.S. law for blockchain token sellers. The defendants (except one that had not provided any services to any U.S. investors) remained subject to U.S. securities laws despite structuring the Tezos Foundation in Switzerland, selecting Switzerland as the forum for litigation in the Token Sale terms, and designating the location of the transactions on foreign soil. As the Tezos Case moves to discovery, there might be later opportunities for the defendants to assert jurisdictional or statutory challenges, but at this stage there are several lessons to learn from the Order:
Blockchain token sellers cannot simply avoid U.S. securities law by structuring legal entities abroad. If a token seller or any of its affiliates engage in marketing or other promotional activities directed at U.S. persons, then U.S. securities law may apply to those activities.
Token sellers should present contractual sale terms using a “clickwrap” agreement or similar function that requires them to confirm and document customer assent in an enforceable manner. When “browsewrap” methods are used instead, sellers are less likely to demonstrate that purchasers clearly and demonstrably assented to sale terms, meaning that any forum-selection clause might not be enforceable in litigation.
Judges may look to the actual situs of a transaction to determine whether the Exchange Act applies. This inquiry goes beyond contractual terms and examines whether the purchaser or seller incurred irrevocable liability to buy or sell the token in the United States. Foreign entities should consider these broad principles when designing and carrying out a token sale.
 561 U.S. 247 (2010).