Case 1:20-cv-02803-ALC Document 1 Filed 04/03/20 Page 1 of 91
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`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
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`ERIC LEE and CHASE WILLIAMS, individually
`and on behalf of all others similarly situated,
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`Plaintiffs,
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`v.
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`BINANCE, CHANGPENG ZHAO, YI HE, and
`ROGER WANG,
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`Defendants.
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`No. ______________
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`JURY DEMANDED
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`CLASS ACTION COMPLAINT
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`Case 1:20-cv-02803-ALC Document 1 Filed 04/03/20 Page 2 of 91
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`Individually and on behalf of all others similarly situated, Plaintiffs Eric Lee and Chase
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`Williams bring this action against Defendants Binance, Changpeng Zhao, Yi He, and Roger Wang.
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`Plaintiffs’ allegations are based upon personal knowledge as to themselves and their own acts, and
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`upon information and belief as to all other matters based on the investigation conducted by and
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`through Plaintiffs’ attorneys, which included, among other things, a review of whitepapers of the
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`digital tokens at issue, press releases, media reports, and other publicly disclosed reports and
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`information about Defendants. Plaintiffs believe that substantial additional evidentiary support
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`will exist for the allegations set forth herein, after a reasonable opportunity for discovery. Plaintiffs
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`hereby allege as follows:
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`I.
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`INTRODUCTION
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`1.
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`On behalf of a class of investors who purchased twelve digital tokens that Binance
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`has sold through its online exchange since July 1, 2017 (the “Class”), without registering under
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`applicable federal and state securities laws as an exchange or broker-dealer, and without a
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`registration statement in effect for the securities it was selling, Plaintiffs and members of the Class
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`seek to recover the consideration paid for the tokens and the fees they paid to Binance in
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`connection with their purchases of EOS, BNT, SNT, QSP, KNC, TRX, FUN, ICX, OMG, LEND,
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`ELF, and CVC (together, the “Tokens”).
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`2.
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`A digital token is a type of digital asset that exists on a “blockchain,” which is
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`essentially a decentralized digital ledger that records transactions. Various digital assets can reside
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`on blockchains, including cryptocurrencies, such as Bitcoin and Ethereum (both discussed in
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`greater detail below), as well as so-called “smart contracts” that operate under a set of
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`predetermined conditions agreed on by users. When those conditions are met, the terms of the
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`contract are automatically carried out by the software underlying the digital tokens (which, as
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`relevant here, are referred to as “ERC-20 tokens” and exist on the Ethereum blockchain).
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`3.
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`Certain of these digital tokens are classified as “utility tokens.” Their primary
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`purpose is to allow the holder to use or access a particular project. For example, one private-jet
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`company issues utility tokens to participants in its membership program, who can then use them
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`to charter flights on the company’s planes. A utility token presumes a functional network on which
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`the token can be used.
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`4.
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`Other tokens are more speculative, and are referred to as “security tokens,” and like
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`a traditional security essentially represent one’s investment in a project. Although the tokens take
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`value from the startup behind the project, they do not give the holder actual ownership in that
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`startup. Rather, investors purchase these tokens with the idea that their value will increase in the
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`future as the network in which the token can be used is expanded based upon the managerial efforts
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`of the issuer and those developing the project. Because such “security tokens” are properly
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`classified as securities under federal and state law, the issuers of these Tokens (the “Issuers”) were
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`required to file registration statements with the U.S. Securities and Exchange Commission
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`(“SEC”), and Binance was required to register itself as an exchange with the SEC. Neither the
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`Issuers nor Binance filed any such registration statements. Instead, Binance and the Issuers entered
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`into contracts to list these Tokens for sale on the Binance exchange in violation of federal and state
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`law. As a result, Binance and the Issuers reaped billions of dollars in profits.
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`5.
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`The scheme worked as follows: working to capitalize on the enthusiasm for
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`cryptocurrencies like bitcoin, an Issuer would announce a revolutionary digital token. This token
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`would typically be billed as “better,” “faster,” “cheaper,” “more connected,” “more trustworthy,”
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`and “more secure.” The Issuer would then sell some of its tokens in an initial coin offering (“ICO”)
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`to a small group of investors and then turn to Binance to list the new token, at which point Binance
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`would undertake its own efforts to promote sales, and to solicit and encourage purchases, by a
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`wide universe of investors. The Issuers would thereby raise hundreds of millions, even billions,
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`of dollars from purchasers of the tokens. Binance would profit handsomely as well by receiving a
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`percentage of each trade and by receiving substantial payments from Issuers to have their tokens
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`listed.
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`6.
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`The Issuers were generally careful to describe these tokens both as providing some
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`specific utility and as something other than “securities.” But the vast majority of these new tokens
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`turned out to be empty promises. They were not “better,” “faster,” “cheaper,” “more connected,”
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`“more trustworthy,” or “more secure” than what existed in the marketplace. In reality, they often
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`had no utility at all. The promises of new products and markets went unfulfilled, with the networks
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`never fully developed, while investors were left holding the bag when these tokens crashed.
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`Indeed, all of the Tokens are now trading at a tiny fraction of their 2017–2018 highs. One of the
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`Tokens at issue, TRX, is down more than 95 percent from its 2018 high. Another token, BNT, is
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`down 98.4 percent from its January 2018 high. QSP was trading at around 72 cents in
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`January 2018; today, it trades at around 0.7 cents. After their ICOs, the prices of OMG and ELF
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`tokens skyrocketed to more than $25 and $2.50 per token, respectively; today, they trade at around
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`$0.56 and $0.06 per token. The EOS token reached a high of $22.89. Today, it is worth only
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`$2.22.
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`7.
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`Investors were provided with scant information when deciding whether to purchase
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`a token. In fact, often the only offering materials available to investors were “whitepapers” that
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`would describe, in highly technical terms, the supposed utility of a token. These whitepapers
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`would often omit, however, the robust disclosures that the securities laws and the SEC have long
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`codified as essential to investor protections in initial public offerings, including use of “plain
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`English” to describe the offering; a required list of key risk factors; a description of key information
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`and incentives concerning management; warnings about relying on forward-looking statements;
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`an explanation of how the proceeds from the offering would be used; and a standardized format
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`that investors could readily follow. Instead, these ICOs were the “Wild West”—with investors
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`left to fend for themselves. Without the mandatory disclosures that would have been required had
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`these ICOs been properly registered with the SEC, investors could not reliably assess the
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`representations made or the risks of their investments.
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`8.
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`In 2017 and 2018, at the height of this frenzy of activity, hundreds of ICOs raised
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`nearly $20 billion with virtually no regulatory oversight or guidance to investors. Issuers and
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`exchanges like Binance, preying on the public’s lack of familiarity with the technology
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`underpinning these tokens, characterized these tokens as “utility tokens,” even though they were
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`in effect bets that a particular project would develop into a successful venture. In truth, these
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`tokens were securities under federal and state securities laws.
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`9.
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`On April 3, 2019, in a “Framework for ‘Investment Contract’ Analysis of Digital
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`Assets” (the “Framework”), the SEC clarified that the Tokens are “investment contracts” and
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`therefore securities under Section 2 of the Securities Act of 1933 (the “Securities Act”), 15 U.S.C.
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`§ 77b(a)(1), and Section 3 of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C.
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`§ 77c(a)(10).1 Prior to that time, a reasonable investor would not have believed that these Tokens
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`were securities that should have been registered with the SEC. But the Tokens are in fact
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`securities. For example, on September 30, 2019—nearly six months after releasing its Framework,
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`and more than two years after the relevant ICO began—the SEC completed an investigation and
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`found that one Issuer, Block.one, had violated the Securities Act by selling the digital token EOS,
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`1 Framework for “Investment Contract” Analysis of Digital Assets, SEC (April 3, 2019),
`https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets#_ednref1.
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`an unregistered security, to the public. As a result of this SEC enforcement action, Block.one was
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`required to pay a $24 million fine.2 The SEC’s determination that EOS was an unregistered
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`security applies with equal force to the other Tokens.
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`10.
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`Binance and the Issuers wrongfully engaged in millions of transactions—including
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`the solicitation, offer, and sale of securities—without registering the Tokens as securities, and
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`without Binance registering with the SEC as an exchange or broker-dealer. As a result, investors
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`were not informed of the significant risks inherent in these investments, as federal and state
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`securities laws require.
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`11.
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`Binance participated in illegal solicitations and sales of securities for which no
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`registration statement was in effect, and as to which no exemption from registration was available.
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`Each ICO was a generalized solicitation made using statements posted on the Internet and
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`distributed throughout the world, including throughout the United States, and the securities were
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`offered and sold to Plaintiffs and the general public in the United States. Because these sales, as
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`well as Binance’s underlying contracts with the Issuers that facilitated these sales, violated both
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`the Securities Act and the Exchange Act, Plaintiffs and the Class are entitled to recover the
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`consideration paid for the Tokens with interest thereon at the legal rate, or the equivalent in
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`monetary damages plus interest at the legal rate from the date of purchase, as well as the fees they
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`paid Binance on such purchases.
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`12.
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`In addition, numerous Class members resided, and were present at the time they
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`traded in the Tokens, in States that provide their own “Blue Sky” protections for investors,
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`2 Press Release, SEC Orders Blockchain Company to Pay $24 Million Penalty for Unregistered
`ICO (Sept. 30, 2019), https://www.sec.gov/news/press-release/2019-202; Block.one, Exchange
`Act Release No. 10714, 2019 WL 4793292 (Sept. 30, 2019).
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`including the State of Texas.3 These States generally provide that the investors in these States who
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`purchased these unregistered tokens are entitled to rescission or damages, as well as interest
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`thereon, attorneys’ fees, and costs.
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`II. PARTIES
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`A.
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`13.
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`Plaintiffs
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`Plaintiff Eric Lee is a resident of Ithaca, New York. Lee and members of the Class
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`purchased Tokens on Binance and pursuant to contracts with Binance, from New York during the
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`Class Period.
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`14.
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`Plaintiff Chase Williams is a resident of Houston, Texas. Williams and members
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`of the Class purchased Tokens on Binance and pursuant to contracts with Binance, from Texas
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`during the Class Period.
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`B.
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`15.
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`Defendants
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`Defendant Binance launched in July 2017. By January 2018, it had become, and
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`remains, the largest cryptocurrency exchange in the world, with a market capitalization of
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`$1.3 billion and the highest trading volume of any such exchange. Binance facilitates trades in
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`digital assets, including the Tokens, by providing a marketplace and facilities for bringing together
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`buyers and sellers of securities, in exchange for Binance taking a fee for every transaction it
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`facilitates.
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`16.
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`Binance’s CEO, defendant Changpeng Zhao, founded Binance in China but shortly
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`thereafter moved Binance’s headquarters to Japan, in advance of the Chinese government’s ban
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`3 These “Blue Sky” statutes are so named because they are designed to protect investors from
`“speculative schemes which have no more basis than so many feet of blue sky.” Hall v. Geiger-
`Jones Co., 242 U.S. 539, 550 (1917) (internal citations omitted). Like the federal securities laws,
`Texas defines “securities” to include “investment contracts,” which has been interpreted by
`Texas courts at least as broadly as the standard set forth by the Supreme Court in S.E.C. v. W.J.
`Howey Co., 328 U.S. 293 (1946).
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`on cryptocurrency trading. In March 2018, as a result of increasing regulatory scrutiny in Japan,
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`Binance moved its headquarters to Malta.
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`17.
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`On February 21, 2020, the Malta Financial Services Authority (“MFSA”) issued a
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`statement responding to media reports referring to Binance as a “Malta-based cryptocurrency”
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`company. The statement said that Binance “is not authorized by the MFSA to operate in the
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`cryptocurrency sphere and is therefore not subject to regulatory oversight by the MFSA.”
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`18.
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`Zhao stated the same day that “Binance.com is not headquartered or operated in
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`Malta . . . There are misconceptions some people have on how the world must work a certain way,
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`you must have offices, HQ, etc. But there is a new world with blockchain now . . . Binance.com
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`has always operated in a decentralized manner as we reach out to our users across more than 180
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`nations worldwide.”
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`19.
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`Although it is thus unclear where Binance is physically headquartered, it is clear
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`that since its founding Binance has regularly and intentionally engaged in numerous online
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`securities transactions inside the United States, with United States residents, without complying
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`with U.S. laws. In addition, Binance has promoted, inside the United States, the sale of digital
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`assets on its exchange.
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`20.
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`21.
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`On information and belief, Zhao resides in Taiwan.
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`Defendant Yi He is the Chief Marketing Officer (“CMO”) of Binance and co-
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`founded Binance along with Zhao and Wang. In her role as CMO, she oversees “all marketing
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`efforts” and has touted that she increased “Binance’s global influence to become a top
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`cryptocurrency exchange.” On information and belief, she resides in Malta.
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`22.
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`Defendant Roger Wang is the CTO of Binance and co-founded Binance with Zhao
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`and He. On information and belief, he resides in Malta.
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`III.
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`JURISDICTION AND VENUE
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`23.
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`Jurisdiction of this Court is founded upon 28 U.S.C. § 1331 because the Complaint
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`asserts claims under Sections 5, 12(a)(1), and 15 of the Securities Act, 15 U.S.C. §§ 77e, 77l(a)(1),
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`77o. This Court further has jurisdiction over the Securities Act claims pursuant to Section 22 of
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`the Securities Act, 15 U.S.C. § 77v.
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`24.
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`Jurisdiction of this Court is also founded upon Section 27 of the Exchange Act,
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`15 U.S.C. § 78aa(a), which provides that federal courts have exclusive jurisdiction over violations
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`of the Exchange Act, including Sections 5, 15(a)(1), 20, and 29(b), 15 U.S.C. §§ 77e,  78o(a)(1),
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`78t,  78cc(b).
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`25.
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`This Court has jurisdiction over the statutory claims of violations under Tex. Rev.
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`Civ. Stat. art. 581-33 pursuant to this Court’s supplemental jurisdiction under 28 U.S.C. § 1367(a).
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`26.
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`This Court has personal jurisdiction over Defendants as a result of acts of
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`Defendants occurring in or aimed at the State of New York in connection with Defendants’ offer
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`or sale of unregistered securities and failure to register with the SEC as an exchange or broker-
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`dealer.
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`27.
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`Venue is proper pursuant to each of 15 U.S.C. § 77v(a) and 15 U.S.C. § 78aa(a) in
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`that this is a district wherein one or more defendants is found or is an inhabitant or transacts
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`business, or in the district where offers or sales at issue took place. For example, a Binance
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`representative promoted Binance at a leading blockchain conference, Consensus, which was held
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`in New York City. Binance has also sought and received approval from the New York State
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`Department of Financial Services for its U.S. Dollar-pegged stablecoin—the “BUSD.”
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`IV. FACTUAL ALLEGATIONS
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`A.
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`28.
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`The First Cryptocurrency: Bitcoin
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`A cryptocurrency is a digital asset designed to work as a medium of exchange or a
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`store of value or both. Cryptocurrencies leverage a variety of cryptographic principles to secure
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`transactions, control the creation of additional units, and verify the transfer of the underlying
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`digital assets.
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`29.
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`Bitcoin was the world’s first decentralized cryptocurrency. It is also the largest and
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`most popular cryptocurrency, with a market capitalization of approximately $126 billion. Bitcoin
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`spawned a market of other cryptocurrencies that, together with bitcoin, have a current market
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`capitalization of approximately $192 billion. (The term “bitcoin” can refer to both a computer
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`protocol and a unit of exchange. Accepted practice is to use the term “Bitcoin” to label the protocol
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`and software, and the term “bitcoin” to label the units of exchange.)
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`30.
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`At its core, Bitcoin is a ledger that tracks the ownership and transfer of every bitcoin
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`in existence. This ledger is called the blockchain.
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`31.
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`Blockchains act as the central technical commonality across most cryptocurrencies.
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`While each blockchain may be subject to different technical rules and permissions based on the
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`preferences of its creators, they are typically designed to achieve the similar goal of
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`decentralization.
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`32.
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`Accordingly, blockchains are generally designed as a framework of incentives that
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`encourages some people to do the work of validating transactions while allowing others to take
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`advantage of the network. In order to ensure successful validation, those completing the validation
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`are also required to solve a “Proof of Work” problem by expending computational resources,
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`which has the effect of making the blockchain more accurate and secure. For Bitcoin, those who
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`validate the blockchain transactions and solve the “Proof of Work” program are rewarded with
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`newly minted bitcoin. This process is colloquially referred to as “mining.” Mining is one method
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`by which an individual can acquire cryptocurrencies like Bitcoin. A second and more common
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`manner is to obtain cryptocurrencies from someone else. This is often accomplished by acquiring
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`it through an online “cryptocurrency exchange.”
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`33.
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`Online cryptocurrency exchanges are one place to purchase bitcoin and other
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`cryptocurrencies. These exchanges are similar to traditional exchanges in that they provide a
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`convenient marketplace to match buyers and sellers of virtual currencies.
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`34.
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`In April 2013,
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`there were only
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`seven cryptocurrencies
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`listed on
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`coinmartketcap.com, a popular website that tracks the cryptocurrency markets. As of this filing,
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`the site monitors more than 2,000 cryptocurrencies.
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`35.
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`For a time, bitcoin was the only cryptocurrency available on exchanges. As
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`cryptocurrencies grew in popularity, exchanges began listing other cryptocurrencies as well, and
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`trading volumes expanded. In early 2013, daily bitcoin trading volumes hovered between
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`$1 million and $25 million. By the end of 2017, daily bitcoin trading volumes ranged between
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`$200 million and $3.8 billion.
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`B.
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`36.
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`Ethereum
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`Ethereum is the second-most popular cryptocurrency, with a market capitalization
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`of approximately $16 billion. The Ethereum blockchain functions similarly to the Bitcoin
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`blockchain insofar as its miners act as the validators of the network. Miners of the Ethereum
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`blockchain are paid for their services in the form of newly minted ether. (The term “Ethereum”
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`refers to the open software platform built on top of the Ethereum blockchain, while the term “ether”
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`is the unit of account used to exchange value within the Ethereum “ecosystem,” i.e., the overall
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`network of individuals using Ethereum or participating in the development of its network. This
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`distinction is thus similar to the “Bitcoin” versus “bitcoin” distinction noted above.)
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`37.
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`Unlike Bitcoin’s blockchain, Ethereum was designed to enable “smart contract”
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`functionality. A smart contract is a program that verifies and enforces the negotiation or
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`performance of a contract. Smart contracts can be self-executing and self-enforcing, which
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`theoretically reduces the transaction costs associated with traditional contracting.
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`38.
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`As an example of how a smart contract works, consider a situation where two
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`people want to execute a hedging contract. They each put up $1,000 worth of ether. They agree
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`that, after a month, one of them will receive back $1,000 worth of ether at the dollar exchange rate
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`at that time, while the other receives the rest of the ether. The rest of the ether may or may not be
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`worth more than it was at the beginning of the month.
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`39.
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`A smart contract enables these two people to submit the ether to a secure destination
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`and automatically distribute the ether at the end of the month without any third-party action. The
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`smart contract self-executes with instructions written in its code which get executed when the
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`specified conditions are met.
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`40.
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`In order to enable widespread adoption and standardized protocols for smart
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`contracts, the Ethereum community has created certain out-of-the box smart contracts called
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`Ethereum Request for Comments (“ERCs”).
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`41.
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`An ERC is an application standard for a smart contract. Anyone can create an ERC
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`and then seek support for that standard. Once an ERC is accepted by the Ethereum community, it
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`benefits Ethereum users because it provides for uniform transactions, reduced risk, and efficient
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`processes. This is because it allows individuals who are less technically proficient to make use of
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`smart contract functionality. The most widespread use of ERCs is to allow individuals to easily
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`launch and create new digital tokens.
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`C.
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`42.
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`ERC-20 Tokens
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`ERC-20 is an application standard that the creator of Ethereum, Vitalik Buterin,
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`first proposed in 2015. ERC-20 is a standard that allows for the creation of smart-contract tokens
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`on the Ethereum blockchain. These tokens are known as “ERC-20 tokens.”
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`43.
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`ERC-20 tokens are built on the Ethereum blockchain, and therefore they must be
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`exchanged on it. Accordingly, ERC-20 tokens are functionally different than cryptocurrencies like
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`Bitcoin and Ethereum because they do not operate on an independent blockchain.
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`44.
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`ERC-20 tokens all function similarly by design—that is, they are compliant with
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`the ERC-20 application standard. Some properties related to ERC-20 tokens are customizable,
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`such as the total supply of tokens, the token’s ticker symbol, and the token’s name. All ERC-20
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`tokens transactions, however, occur over the Ethereum blockchain; none of them operates over its
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`own blockchain.
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`45.
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`ERC-20 tokens are simple and easy to deploy. Anyone with a basic understanding
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`of Ethereum can use the ERC-20 protocol to create her own ERC-20 tokens, which she can then
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`distribute and make available for purchase. Even people without any technical expertise can have
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`their own ERC-20 token created for them, which can then be marketed to investors.
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`D.
`
`46.
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`The Advent Of The “ICO”
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`Between 2014 and 2016, bitcoin’s price fluctuated between $200 and $800. During
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`this same time frame, ether’s price fluctuated between roughly $1 and $10.
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`47.
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`By the end of 2016, interest in cryptocurrencies began to accelerate, with prices
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`growing at a rate historically unprecedented for any asset class. Over the course of 2017 alone,
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`bitcoin’s price increased from approximately $1,000 to approximately $20,000. Ethereum’s
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`growth was even more startling. On January 1, 2017, Ethereum was trading at approximately
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`$8 per ether. Approximately one year later, it was trading at over $1,400 per ether—a return of
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`approximately 17,000 percent over that period.
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`48.
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`Seeking to capitalize on the growing enthusiasm for cryptocurrencies, many
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`entrepreneurs sought to raise funds through initial coin offerings, or ICOs, including ICOs for
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`newly created ERC-20 tokens, such as the Tokens. Many of these issuers improperly chose not to
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`register their securities offerings with the SEC in order to save money and not “open their books”
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`to the SEC, even though investors thereby were denied access to critical information they would
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`have received from an SEC-registered offering. As a result investors, including investors in digital
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`tokens, were denied access to important information before making their investment decision.
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`49.
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`Potential purchasers were reached through various cryptocurrency exchanges and
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`social media sites that published active and upcoming ICOs.
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`50.
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`Between 2017 and 2018, nearly $20 billion was raised through ICOs. None of these
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`ICOs was registered with the SEC. Of the approximately 800 ICOs launched between 2017 and
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`2018, the vast majority were issued using the ERC-20 protocol.
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`51.
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`ERC-20 ICOs were typically announced and promoted through public online
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`channels. Issuers typically released a “whitepaper” describing the project and terms of the ICO,
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`and promoted the sale of the tokens. They typically advertised the creation of a “new blockchain
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`architecture.”
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`52.
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`The whitepapers contained vastly less information than would have been included
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`in an SEC registration statement. For example, whitepapers typically did not include a “plain
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`English” description of the offering; a list of key risk factors; a description of important
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`information and incentives concerning management; warnings about relying on forward-looking
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`statements; an explanation of how the proceeds from the offering would be used; or a standardized
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`format that investors could readily follow.
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`53.
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`As a result of the lack of information, trading of tokens on exchanges such as
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`Binance was rife for manipulation. In fact, as Aries Wanlin Wang, the founder of a rival exchange,
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`admitted, “the secondary market [for digital assets] can be rigged by manipulators. If you put
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`major currencies such as Bitcoin and Ethereum aside, many of the tokens you’ll find issued through
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`ICOs are there to be manipulated. These tokens are similar to penny stocks. And everyone wants
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`to believe they’ve discovered the next Bitcoin and Ethereum.” Mr. Wang further conceded that
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`“[t]he problems facing the secondary market in crypto are similar to the problems that were faced
`
`by American stock exchanges 100 years ago. When a market lacks certain regulations and
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`oversights, predictable things happen. Pump and dumps are very common in the secondary market
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`of cryptocurrency, just as they were on the US stock exchange so many years ago.”
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`54.
`
`The Issuers declined to register the Tokens with the SEC, and Binance declined to
`
`register itself as an exchange or broker-dealer, which registrations would have provided crucial
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`risk disclosure to investors, including members of the Class.
`
`E.
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`55.
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`Binance Solicited And Sold ERC-20 Tokens
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`Binance solicited the buying and selling of ERC-20 tokens on its unregistered
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`exchange and reaped extraordinary profits as a result.
`
`56.
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`In fact, Binance recently boasted on its website that, in 2019 alone, it averaged more
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`than $2.8 billion in daily trading volume, had more than 15 million users world-wide, and listed
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`184 tokens. Public reporting shows that, in 2018 alone, Binance brought in $446 million in profit.
`
`57.
`
`How did a company that was barely a year old generate such extraordinary profits?
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`By building a platform that solicited the buying and selling of unregistered securities on a
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`historically unprecedented scale. Defendants did this by taking advantage of the market’s lack of
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`sophistication with digital tokens, particularly ERC-20 tokens, and the general market excitement
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`for Bitcoin and Ethereum more generally.
`
`58.
`
`Shortly after an issuer launched an ICO, the issuer would quickly seek to have its
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`tokens listed on cryptocurrency exchanges like Binance, in order to give the issuer access to
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`millions of retail investors to whom they could market the tokens.
`
`59.
`
`On July 11, 2018, in an interview with CNBC, Zhao stated that there are three key
`
`fundamentals Binance considers before it lists a token: the whitepaper, the team, and the users.
`
`Zhao explained:
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`If a project has a concept, that’s good. But, Binance is presently too
`big to list concept coins. They advise that if you just have a concept,
`it is better to list on smaller exchanges first, and Binance can monitor
`the performance of the business.
`
`Zhao noted that the team behind a particular token is a fundamental factor to the
`
`60.
`
`success of a project: “It’s kind of hard to tell if they’re going to do the right thing or the wrong
`
`thing. But a team with a good history tends to carry on.” Zhao explained that “if you have a good
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`project, we will list it.”
`
`61.
`
`In discussing Binance’s role in cryptocurrency, Zhao stated: “As the exchange, we
`
`are the liquidity provider. If you think about cryptocurrency as the blood of the economy, we are
`
`the heart, we are pumping the blood. Right, so we are making everything circulate.”
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`62.
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`Shortly after Binance agreed to list a new token on its cryptocurrency exchange, it
`
`would advertise that listing to its user base, such as per the below:
`
`63.
`
`In announcing a new token available for trading, Binance would sometimes run
`
`promotions to “celebrate the launch” of the token. On September 26, 2017, for example, when
`
`launching FUN token (an ERC-20 token), Binance “committed a total of 3,000,000 FUN tokens
`
`to reward customers worldwide.”
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`64.
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`Just a few months after this announcement, the price of FUN token went from about
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`2 cents per token up to 20 cents per token, a 10X increase in trading value. By January 2019, the
`
`price of a FUN token had collapsed to less than half a cent per token:
`
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`65.
`
`Each of the Tokens was listed on Binance, pursuant to agreements with the Issuers,
`
`and each was traded by members of the Class.
`
`66.
`
`Binance profited handsomely from listing of new tokens on its platform. In
`
`addition to receiving fees for each transaction performed on its exchange, Binance received large
`
`cash payments from Issuers seeking to get their tokens listed. These fees often exceeded $1 million
`
`per listing.
`
`F.
`
`Investors Would Not Reasonably Have Understood Prior To April 3, 2019,
`At The Earliest, That The Tokens Were Securities
`
`67.
`
`In connection with the ICOs, from 2017 until early 2019, the Issuers and Binance
`
`made statements that reasonably led Plaintiffs and Class members to conclude that the Tokens
`
`were not securities.
`
`68.
`
`Issuers. Issuers of ERC-20 tokens repeatedly asserted that their tokens were “utility
`
`tokens,”