Case 1:20-cv-02804-VSB Document 1 Filed 04/03/20 Page 1 of 46
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`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
`
`
`ALEXANDER CLIFFORD and CHASE
`WILLIAMS, individually and on behalf of all others
`similarly situated,
`
`
`Plaintiffs,
`
`
`
`No. ______________
`
`JURY DEMANDED
`
`
`TRON FOUNDATION, JUSTIN SUN, and
`ZHIQIANG (LUCIEN) CHEN,
`
`
`
`
`v.
`
`
`
`
`
`
`
`Defendants.
`
`CLASS ACTION COMPLAINT
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`Case 1:20-cv-02804-VSB Document 1 Filed 04/03/20 Page 2 of 46
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`Plaintiffs Alexander Clifford and Chase Williams, individually and on behalf of all others
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`similarly situated, bring this action against Defendants TRON Foundation (“TRON”), Justin Sun,
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`and Zhiqiang (Lucien) Chen. Plaintiffs’ allegations are based upon personal knowledge as to
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`themselves and their own acts, and upon information and belief as to all other matters based on the
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`investigation conducted by and through Plaintiffs’ attorneys, which included, among other things,
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`a review of relevant whitepapers, press releases, media reports, and other publicly disclosed reports
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`and information about Defendants. Plaintiffs believe that substantial additional evidentiary
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`support will exist for the allegations set forth herein, after a reasonable opportunity for discovery.
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`Plaintiffs hereby allege as follows:
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`I.
`
`INTRODUCTION
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`1.
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`Within the Class Period, which is from June 26, 2017, through the present, TRON
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`and individual defendants Justin Sun and Zhiqiang (Lucien) Chen (the “Individual Defendants”)
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`promoted, offered, and sold TRON’s securities, called TRX tokens, throughout the United States,
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`in violation of federal and state securities laws. Plaintiffs individually and on behalf of investors
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`who purchased TRX in the United States (the “Class”) bring claims to recover the consideration
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`paid for the TRX tokens, together with interest thereon, as well as attorneys’ fees and costs.
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`2.
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`A digital token is a type of digital asset that exists on what is called a “blockchain,”
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`which is essentially a decentralized digital ledger that records transactions. Various digital assets
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`can reside on blockchains, including cryptocurrencies, such as Bitcoin and Ethereum (both
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`discussed in greater detail below), as well as so-called “smart contracts” that operate under a set
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`of predetermined conditions agreed to by users. With smart contracts, the terms of the contract
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`are automatically carried out by the software underlying the digital tokens (which, as relevant here,
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`are referred to as “ERC-20 tokens” and exist on the Ethereum blockchain) when the agreed
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`conditions are met.
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`3.
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`Certain of these digital tokens are sometimes classified as “utility tokens” and are
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`associated with particular projects. Their primary purpose is to allow the holder to use or access
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`the associated project. For example, one private-jet company issues utility tokens to participants
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`in its membership program, who can then use them to charter flights on the company’s planes. A
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`utility token presumes a functional network on which 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 they take value
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`from the startup behind the project, they do not give the holder ownership in that startup. Rather,
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`investors purchase these tokens with the idea that their value will increase in the future as the
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`network in which the token can be used is expanded based upon the managerial efforts of the issuer
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`and those developing the project. Because such “security tokens” are properly classified as
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`securities under federal and state law, the issuers of these tokens, including TRON, were required
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`to file registration statements with the U.S. Securities and Exchange Commission (“SEC”).
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`TRON, however, failed to do so. By selling these unregistered tokens to investors, TRON reaped
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`millions of dollars in profits.
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`5.
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`The scheme worked as follows: First, TRON issued a “whitepaper” to investors
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`that described in highly technical terms the supposed utility to which TRX would be placed. The
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`TRON whitepaper, however, omitted the disclosures that securities laws and the SEC have long
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`deemed essential to investor protections in initial public offerings, including use of “plain English”
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`to describe the offering; a description of key information and incentives concerning management;
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`warnings about relying on forward-looking statements; an explanation of how the proceeds from
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`the offering would be used; and a standardized format that investors could readily follow. Without
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`these critical disclosures, investors in TRX tokens were thus left to fend for themselves—precisely
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`the opposite of what the securities laws require.
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`6.
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`TRON then sold the TRX tokens to investors through an “initial coin offering” (or
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`“ICO”). TRON kept 35 percent of the TRX tokens for itself and solicited online exchanges of
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`digital assets (known as “cryptocurrency exchanges”) to list TRX tokens on their platforms and
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`encourage purchases by a wide universe of investors. Although TRX was a security, TRON did
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`not register it as a security with the SEC and did not qualify for an exemption from registration
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`requirements.
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`7.
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`TRON did not disclose at issuance that TRX was a security. In fact, the TRON
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`whitepaper expressly stated that “TRX is not a security” and that “owning TRX does not mean
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`that its owner has been afforded with the proprietary right, controlling right, and/or policy-making
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`right regarding the TRON platform.” Misleadingly, the whitepaper identified potential “risks after
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`supervisory regulations are formed.” This disclaimer merely contemplated potential future
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`regulations that could impact the status of the TRX offering, indicating the regulations did not
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`apply at the time:
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`Investors thus reasonably understood that TRX was not subject, at issuance, to U.S. securities laws.
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`In addition, TRON further confirmed to investors at issuance that TRX was not a security by failing
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`to file a registration statement for it with the SEC.
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`8.
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`TRON promoted, offered, and sold TRX through generalized solicitations using
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`statements posted on the Internet and distributed throughout the United States and the rest of the
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`world, such that TRON offered and sold the securities to Plaintiffs and the general public in the
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`United States. Although TRON described the TRX tokens as something other than securities, they
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`were securities. This was not clear to a reasonable investor at purchase, however, and would not
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`have been reasonably apparent until, at the earliest, April 3, 2019, when the SEC released a detailed
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`“Framework” to analyze digital assets, indicating that TRX and other similar digital tokens are
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`“investment contracts” and therefore securities under Section 2 of the Securities Act of 1933 (the
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`“Securities Act”), 15 U.S.C. § 77b(a)(1).1 Prior to that time, based on statements of TRON and
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`the SEC, a reasonable investor would not have concluded that such tokens were securities under
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`federal and state law. But TRX was a security under the applicable SEC Framework. TRON thus
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`engaged in transactions that consisted of the solicitation, offer, and sale of securities without
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`registering them as federal and state laws require for the protection of investors.
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`9.
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`On September 30, 2019, nearly six months after releasing its Framework, the SEC
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`found that another major issuer of digital tokens, Block.one, which had issued a token called EOS
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`between June 2017 and June 2018, had likewise violated the Securities Act by selling unregistered
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`securities to the public. The EOS token was functionally identical to TRX—both tokens were not
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`described as securities to investors, but are securities under the SEC’s April 2019 Framework. As
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`a result of an SEC enforcement action, Block.one was required to pay a $24 million fine.2 The
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`SEC’s determination that EOS is a security applies with equal force to TRX.
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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.
`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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`10.
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`Plaintiffs and the Class are entitled to recover the consideration they paid for the
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`TRX tokens with interest thereon at the legal rate, or the equivalent in monetary damages plus
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`interest at the legal rate from the date of purchase.
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`11.
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`In addition, numerous Class members resided, and were present at the time they
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`traded in TRX tokens, in States that provide their own “Blue Sky” protections for investors,
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`including the States of Illinois and Texas.3 Under these laws, investors in Illinois and Texas who
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`purchased unregistered TRX securities are entitled to rescission, as well as interest thereon,
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`attorneys’ fees, and costs.
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`12.
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`Accordingly, Plaintiffs individually and on behalf of the Class bring claims to
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`recover the consideration paid for the TRX tokens, together with interest thereon, as well as
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`attorneys’ fees and costs.
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`II.
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`PARTIES
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`A.
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`13.
`
`Plaintiffs
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`Plaintiff Alexander Clifford is a resident of Chicago, Illinois. Clifford and
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`members of the Class purchased TRX, an unregistered security, from Illinois during the Class
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`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 TRX, an unregistered security, from Texas during the Class Period.
`
`
`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, Illinois and Texas define “securities” to include “investment contracts,” which has been
`interpreted by Illinois and 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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`B. Defendants
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`15.
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`Defendant TRON is an entity formed under the laws of Singapore with offices in
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`California, Singapore, and Beijing. TRON is a blockchain-focused software development
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`company that is currently developing and promoting the TRON blockchain protocol.
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`16.
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`Defendant Justin Sun is a co-founder of TRON. He resides in San Francisco,
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`California.
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`17.
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`Defendant Zhiqiang (Lucien) Chen is a co-founder of TRON and the former Chief
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`Technology Officer (“CTO”) of TRON. He resides in San Francisco, California.
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`III.
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`JURISDICTION AND VENUE
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`18.
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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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`19.
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`This Court has jurisdiction over the statutory claims of violations under 815 Ill.
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`Comp. Stat. Ann. 5/13 pursuant to this Court’s supplemental jurisdiction under 28 U.S.C.
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`§1367(a).
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`20.
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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.
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`21.
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`Venue is proper pursuant to 15 U.S.C. § 77v(a) in that this is a district wherein one
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`or more defendants is found or transacts business or where the offer or sale of TRX tokens took
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`place. In 2018 and 2019, TRX representatives, including Justin Sun, attended and spoke at
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`conferences in which they touted TRX, including in this district. For example, in May 2019, Justin
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`Sun attended and spoke at the Consensus Conference, one of the biggest crypto-asset conferences
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`of the year, in New York City.
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`IV.
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`FACTUAL ALLEGATIONS
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`A. The First Cryptocurrency: Bitcoin
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`22.
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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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`23.
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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 $192 billion. (The term “bitcoin” can refer to both a computer protocol and a unit
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`of exchange. Accepted practice is to use the term “Bitcoin” to label the protocol and software, and
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`the term “bitcoin” to label the units of exchange.)
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`24.
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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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`25.
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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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`26.
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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.”
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`27. Mining is one method by which an individual can acquire cryptocurrencies like
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`Bitcoin. A second and more common manner is to obtain cryptocurrencies from someone else.
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`This is often accomplished by acquiring it through an online “cryptocurrency exchange.” Online
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`cryptocurrency exchanges are one place to purchase Bitcoin and other cryptocurrencies. These
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`exchanges are similar to traditional exchanges in that they provide a convenient marketplace to
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`match buyers and sellers of virtual currencies.
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`28.
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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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`29.
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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 $1
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`million and $25 million. By the end of 2017, daily Bitcoin trading volumes ranged between $200
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`million and $3.8 billion.
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`B. Ethereum
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`30.
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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.)
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`31.
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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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`32.
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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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`33.
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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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`34.
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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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`35.
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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. The most widespread use of ERCs is to allow individuals to easily launch and create
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`new digital tokens.
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`C. ERC-20 Tokens
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`36.
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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, known as “ERC-20 tokens.”
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`37.
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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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`38.
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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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`39.
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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. The Advent Of The “ICO”
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`40.
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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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`41.
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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 $8
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`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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`42.
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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 TRX token. Many of these issuers improperly chose
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`not to register their securities offerings with the SEC in order to save money and not “open their
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`books” to the SEC, even though investors thereby were denied access to critical information they
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`would have received from an SEC-registered offering. As a result, investors, including investors
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`in TRX, were denied access to important information before making their investment decision.
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`43.
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`In the case of TRX, the initial offering occurred over a three-day period, with 40
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`billion (or 40 percent of the total supply) of TRX tokens sold, raising approximately $70 million.
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`Investors would explore the various cryptocurrency exchanges and social media sites that
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`published active and upcoming ICOs. Many of these postings encouraged trading in TRX for
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`profit. As one poster explained: “We hit 1 bil market cap. Surely its getting recognition. Lots of
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`them made such good profit already and will cash out. I bought [at] .007 [dollars / TRX] yesterday
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`and already doubled up, so its never late for new investors. I m holding till 1$ at least!”
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`44.
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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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`45.
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`Like most ICOs, ERC-20 ICOs were typically announced and promoted through
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`public online channels. Issuers, including TRON, typically released a “whitepaper” describing the
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`project and terms of the ICO. These whitepapers advertised the sale of tokens or coins through
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`the ICO. They typically advertised the creation of a “new blockchain architecture.”
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`46.
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`The whitepapers typically contained vastly less information than a registration
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`statement filed with the SEC would have included. For example, whitepapers did not include a
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`“plain English” description of the offering; a description of important information and incentives
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`concerning management; warnings about relying on forward-looking statements; an explanation
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`of how the proceeds from the offering would be used; or a standardized format that investors could
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`readily follow.
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`47. When tokens were sold through an ERC-20 ICO, the issuer usually asserted that
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`such tokens entitled their holders to certain rights related to a venture underlying the ICO, such as
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`the right to use certain services provided by the issuer. In almost all cases, these tokens could also
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`be traded, thereby giving investors a reasonable expectation of profits to be derived from the
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`entrepreneurial or managerial efforts of others (that is, the people operating the issuer whose efforts
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`will impact the value of those tokens on the secondary market).
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`48.
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`These tokens were frequently listed on cryptocurrency exchanges, where they were
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`bought and sold using other cryptocurrencies (such as Bitcoin or Ethereum) or traditional
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`currencies such as the U.S. dollar.
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`E. TRON Solicited And Sold The TRX Token Through Both An ICO And Through
`Subsequent Sales On Cryptocurrency Exchanges
`
`49.
`
`In June 2017, TRON published the first version of the “TRON whitepaper.”
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`Casting the TRON protocol as an attempt to “heal the Internet,” the whitepaper described the
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`protocol as “the blockchain’s entertainment system of free content, in which TRX, TRON’s coin,
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`is circulated.” The whitepaper asserted that, through TRX, content providers would no longer
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`need to pay high fees to centralized platforms such as Google Play and Apple’s App Store.
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`50.
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`TRX was launched through use of the ERC-20 protocol. At launch, 100 billion
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`tokens were created through use of the ERC-20 protocol.
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`51.
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`TRON retained approximately 35 percent of those tokens. TRON sold 15 percent
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`of the tokens in what TRON described as a “private offering.” TRON used 10 percent of the
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`tokens to pay Peiwo Huanle Technology, an initial TRON supporter.
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`52.
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`The remaining 40 percent of the token were sold during TRX’s ICO, which TRON
`
`organized and ran. Over its three-day ICO, from August 31 to September 2, 2017, TRON raised
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`approximately $70 million in proceeds.
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`53.
`
`The TRON ICO was promoted on unregistered cryptocurrency exchanges,
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`including Binance:
`
`54.
`
`TRON promoted and advertised TRX tokens in the United States. In 2017 and
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`2018, TRX representatives, including Justin Sun and Lucien Chen, attended and spoke at
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`numerous conferences in which they touted TRX, including in New York City and San Francisco,
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`
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`California.
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`F. Investors Would Not Reasonably Have Understood Prior To April 3, 2019, At
`The Earliest, That TRX Was A Security
`
`55.
`
`TRON and its promoters made numerous statements that would have led a
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`reasonable investor to conclude that the tokens sold in its ICO were not securities.
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`56.
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`As an initial matter, TRON’s whitepapers stated that “TRX is not a security” and
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`that “owning TRX does not mean that its owner has been afforded with the proprietary right,
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`controlling right, and/or policy-making right regarding the TRON platform.” The whitepaper then
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`stated expressly, “TRX does not belong to any of the following categories: (a) currency of any
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`type; (b) securities; (c) stock rights of a legal entity; (d) stocks, bonds, bills, warrants, certificates,
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`investment contract, or other instruments affording similar rights.” Further, TRON failed to
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`register its offering of TRX with the SEC, thus further confirming to investors that TRX was not
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`a security.
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`57. Misleadingly, TRON also promoted itself as being similar to Bitcoin, which is not
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`a security nor required to be registered with the SEC. The TRON whitepaper asserted, for
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`example, that its “distributed user registration mechanism is as secure as Bitcoin”; “the number of
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`blocks generated per hour is automatically set by the system, which is similar to the Bitcoin
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`network”; and “[s]imilar to Bitcoin, [t]he [TRON] market is based on blockchain and trade in
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`virtual currency.”
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`58.
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`Similarly, TRON’s founder, Justin Sun, promoted TRON’s offerings as similar to
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`and “better than” Ethereum. For example, in multiple tweets, Sun touted TRON as being “better
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`than” ETH, which, unlike TRX, is not a security. Sun has named himself the “Ethereum killer”
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`and further promoted TRON over Ethereum by announcing on Twitter that he wanted to create a
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`fund to “rescue” developers working on Ethereum (and EOS) “from the collapse of their platform
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`Case 1:20-cv-02804-VSB Document 1 Filed 04/03/20 Page 16 of 46
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`as long as those developers migrate . . . to #TRON. #TRX.” Sun also has tweeted that TRON is
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`“100x faster than #ETH” and that TRON “100% guarantee[s] better user experience!”
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`59.
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`At the time of the TRX ICO, TRON took advantage of the market’s lack of
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`understanding and awareness concerning how cryptocurrencies worked. In the face of promises
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`that TRX would be “similar to Bitcoin,” and “better than” Ethereum, and considering the new
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`technology at issue and TRON’s other statements, many investors were understandably unaware
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`that TRX tokens had fundamentally different features than other cryptocurrencies, which the SEC
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`has determined are not securities. Moreover, the TRON whitepaper was ambiguous about how
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`TRON would use the proceeds, stating only that “the ‘profit’ earned by the Foundation is deemed
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`surplus and will be kept as outlays for other activities instead of being distributed among its
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`members.”
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`60.
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`This messaging was repeated to the media by TRON and its executives. Sun, in a
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`November 2017 interview, suggested that the TRX token would be used for “enabling this content
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`ecosystem” that TRON created, giving the impression the TRX was a utility token that was worth
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`purchasing for its functionality.
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`61.
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`Prior to April 3, 2019, when the SEC released its Framework, it was therefore
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`unclear to a reasonable investor that TRX was a security. On June 14, 2018, for example, the
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`Director of the Corporation Finance Division, William H. Hinman, explained that “the ICOs I am
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`seeing, strictly speaking, the token—or coin or whatever the digital information packet is called—
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`all by itself is not a security.” On May 2, 2018, Commissioner Hester Peirce similarly expressed
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`her view that not “all ICOs must be deemed securities offerings.” Commissioner Peirce identified
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`numerous open questions that issuers like TRX emphasized when arguing ERC-20 tokens are not
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`securities, such as the utility of the TRX token in an incomplete or partially complete network.
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`Case 1:20-cv-02804-VSB Document 1 Filed 04/03/20 Page 17 of 46
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`62.
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`Other thought leaders in the space, such as the lawfully registered broker-dealer
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`Coinbase, opined in late 2016 that “we have considered the question of whether issuance of a
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`Blockchain Token prior to the existence of a system would constitute a security. We have not
`
`found conclusive law on the subject, but believe that the better view is that a non-security
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`Blockchain Token does not become a security merely because the system as to which it has rights
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`has not yet been created or completed.”
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`63.
`
`As recently as January 15, 2019, a news article discussing the listing of TRX on the
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`OKCoin exchange stated, “Tron Is Not A Security.” The article then quoted that exchange’s
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`founder as saying, “We do not have an ATS or a broker-dealer license, so we cannot facilitate the
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`trading of securities. We made sure that TRX is used today as a utility. That there is a use case,
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`that it passes the Howey Test, kind of laid out by the prior rulings of an SEC case, that’s the best
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`we have.”
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`64.
`
`In sum, before the SEC issued its Framework on April 3, 2019, a reasonable
`
`investor would not have concluded that ERC-20 tokens like the TRX token were generally
`
`securities subject to the securities laws. On the contrary, they were confronted with representations
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`both from token issuers and from cryptocurrency discussions that would have led them reasonably
`
`to believe they were not investing in securities.
`
`G. The TRX Tokens Are Securities
`
`65.
`
`TRX tokens are securities because they constituted an investment of money in a
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`common enterprise with a reasonable expectation of profits to be derived from the efforts of others.
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`At issuance, as described above, it was not clear that the TRX tokens were securities as defined
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`under federal and state securities laws. TRON acted as if the TRX tokens were not securities, for
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`example, by not ensuring that a registration statement was filed with the SEC, which would have
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`Case 1:20-cv-02804-VSB Document 1 Filed 04/03/20 Page 18 of 46
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`provided important disclosures to investors of the risks inherent in these investments, including
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`their speculative nature.
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`66. Moreover, TRON misleadingly compared TRX to Bitcoin in its whitepaper. The
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`distinction between Bitcoin and Ethereum, on the one hand, and digital tokens, such as TRX, on
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`the other, was material to investors, including in evaluating whether TRX is a security. When the
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`Bitcoin and Ethereum systems were created, only a tiny fraction of the underlying cryptocurrency
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`units was in existence. As a result, increases in bitcoin and ether could occur at a fixed rate over
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`time, such as from mining. The growth of Bitcoin and Ethereum thus occurs through a
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`decentralized process as numerous users engage in mining and other efforts to build the ecosystem.
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`67.
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`By contrast, TRON issu