Case 1:20-cv-03829 Document 1 Filed 05/18/20 Page 1 of 50
`
`
`IN THE UNITED STATES DISTRICT COURT
`FOR THE SOUTHERN DISTRICT OF NEW YORK
`
`
`
`CRYPTO ASSETS OPPORTUNITY
`FUND LLC and JOHNNY HONG,
`individually and on behalf of all others
`similarly situated,
`
`
`
`
`
`Civ. No.
`JURY TRIAL DEMANDED
`
`Plaintiffs,
`
`v.
`
`BLOCK.ONE, BRENDAN BLUMER,
`DANIEL LARIMER, IAN GRIGG, and
`BROCK PIERCE,
`
`
`Defendants.
`
`
`
`
`
`
`
`
`CLASS ACTION COMPLAINT FOR VIOLATIONS
`OF THE FEDERAL SECURITIES LAWS
`
`
`
`
`
`
`
`
`
`
`
`
`1:20-cv-3829
`
`

`

`Case 1:20-cv-03829 Document 1 Filed 05/18/20 Page 2 of 50
`
`
`
`
`Plaintiffs Crypto Assets Opportunity Fund LLC and Johnny Hong, together and on behalf
`
`of all others similarly situated, by their undersigned attorneys, bring this action against Defendants
`
`Block.one, Brendan Blumer, Daniel Larimer, Ian Grigg, and Brock Pierce (collectively,
`
`“Defendants”). With knowledge of their own acts and acts taking place in their presence, and upon
`
`information and belief as to all other matters, Plaintiffs allege the following:
`
`I.
`
`1.
`
`SUMMARY OF THE ACTION
`
`This is a federal securities class action that asserts claims under the Securities Act
`
`of 1933 (the “Securities Act”) and the Exchange Act of 1934 (the “Exchange Act”). This action
`
`is brought on behalf of all investors who purchased securities issued by Block.one called “EOS
`
`Tokens” (the “EOS Securities”) during the period of June 26, 2017 to the present (the “Class
`
`Period”). This action asserts claims arising under Sections 5 and 12(a)(1) of the Securities Act for
`
`failure to register the EOS Securities pursuant to the federal securities laws; Section 12(a)(2) of
`
`the Securities Act for issuing the EOS Securities pursuant to a materially false and misleading
`
`prospectus; Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder for
`
`disseminating materially false and misleading statements concerning the EOS Securities during
`
`the Class Period; and Section 15 of the Securities Act and Section 20(a) of the Exchange Act for
`
`control person liability.
`
`2.
`
`This case arises out of a fraudulent scheme, fueled by a global frenzy over
`
`cryptocurrencies and unchecked human greed, to raise billions of dollars through sales of a
`
`cryptocurrency called EOS – an unregistered security – to investors in violation of the United
`
`States federal securities laws. To drive the demand for and increase profit from the sales of EOS
`
`Securities, Defendants further violated the securities laws by making materially false and
`
`
`
`2
`
`

`

`Case 1:20-cv-03829 Document 1 Filed 05/18/20 Page 3 of 50
`
`
`
`
`misleading statements about EOS, which artificially inflated the prices for the EOS Securities and
`
`damaged unsuspecting investors.
`
`3.
`
`Block.one was founded in early 2017 by Brock Pierce, Brendan Blumer, and Daniel
`
`Larimer. They sought to capitalize on the investor fervor for cryptocurrencies by promising that
`
`they would develop software to run a new highly decentralized blockchain (the “EOS
`
`Blockchain”). Blockchains are ledgers that record digital transactions between two parties.
`
`Access rights to the assets in those transactions are represented by cryptographic tokens, which are
`
`commonly referred to as “cryptocurrency.” The most prominent cryptocurrency is bitcoin, but
`
`many others exist, including ether.
`
`4.
`
`The most important feature of blockchains is that they are “decentralized.”
`
`Centralized platforms are controlled by a centralized authority. Some prominent digital examples
`
`are Yahoo! and Facebook. The centralized authority has the power to collect and store user data,
`
`can set the rules of engagement for the platform, and can make unilateral determinations that affect
`
`all users. Centralization requires inherent trust in the central authority controlling the platform,
`
`including that it will ensure that users’ data remains secure. But since all the information flows
`
`through a single, central authority, centralized platforms are relatively easy to hack.
`
`5.
`
`Decentralized systems spread the power and authority among many users. The
`
`more users that are tied to a particular system, the more decentralized the platform becomes.
`
`Specifically, decentralized platforms such as blockchain depend on many users to verify
`
`information, and information flows directly from person to person, rather than through a
`
`centralized authority. The main benefits are efficiency (from the elimination of transaction
`
`intermediaries); transparency (from ability to access entire record of transactions by any user); and
`
`security (from lack of central point of failure).
`
`
`
`3
`
`

`

`Case 1:20-cv-03829 Document 1 Filed 05/18/20 Page 4 of 50
`
`
`
`
`6.
`
`Decentralization occurs in degrees, and Block.one hyped its ability to create a more
`
`decentralized system that was superior to the blockchains already in existence: the EOS
`
`Blockchain. In order to fund the development of software that would underlie its new blockchain
`
`(i.e., the “EOSIO software”), Block.one began to devise a plan to offer and sell EOS Securities in
`
`an “initial coin offering,” or “ICO.” Defendants first publicly announced this plan on or about
`
`May 22, 2017, at a conference in New York City. The announcement was accompanied by a
`
`flashy, expensive ad purchase on a large billboard overlooking Times Square.
`
`7.
`
`On June 5, 2017, Block.one published a White Paper, which touted “a new
`
`blockchain architecture designed to enable vertical and horizontal scaling of decentralized
`
`applications. This is achieved by creating an operating system-like construct upon which
`
`applications can be built. . . . The resulting technology is a blockchain architecture that may
`
`ultimately scale to millions of transactions per second, eliminates user fees, and allows for quick
`
`and easy deployment and maintenance of decentralized applications, in the context of a governed
`
`blockchain.” The White Paper included a section called “Governance,” which highlighted the
`
`features that purportedly would enhance decentralization of the EOS Blockchain.
`
`8.
`
`On June 26, 2017, Defendants began selling the EOS Securities in a year-long ICO
`
`aimed at both wealthy investors and the general public. Block.one kept 10 percent of the EOS
`
`Securities for itself and solicited online exchanges of digital assets (known as “cryptocurrency
`
`exchanges”) to list EOS Securities on their platforms and encourage purchases by a wide universe
`
`of investors. Block.one offered and sold EOS Securities using the “EOS Purchase Agreement,”
`
`which did not comply with the requirements for a registered offering of securities, nor did the EOS
`
`Securities qualify for an exemption to the registration requirements under the federal securities
`
`laws. By failing to prepare and file a registration statement, Block.one did not provide critical
`
`
`
`4
`
`

`

`Case 1:20-cv-03829 Document 1 Filed 05/18/20 Page 5 of 50
`
`
`
`
`information to purchasers of EOS Securities, such as information about Block.one’s financial
`
`condition, future plans of operation and budget, the proposed uses of investor proceeds, and
`
`detailed disclosures of material trends and the most significant factors that made the ICO
`
`speculative and risky. Block.one thus failed to disclose information that was relevant to investors’
`
`evaluation of Block.one’s promises about the EOS Securities and EOSIO software.
`
`9.
`
`Following their initial sale, the EOS Securities also traded in a secondary market,
`
`including on the U.S. exchanges Coinbase and Kraken, which are cryptocurrency trading
`
`platforms. Since July 2017, just one month after the start of its public sale of EOS Securities, EOS
`
`has been trading on these exchanges, soaring to a high of $22.89 on April 29, 2018.
`
`10. While Block.one did not provide a registration statement, the Individual
`
`Defendants, who promoted the sale of the EOS Securities, made dozens of materially false and
`
`misleading statements to induce investors to purchase the EOS Securities. These statements were
`
`disseminated both prior to the launch of the ICO and throughout its duration, inflating the price of
`
`the EOS Securities sold both in the ICO and on the secondary market. The false statements
`
`concerned the capabilities of the anticipated EOSIO software that Block.one was developing,
`
`including in particular its ability to support a “decentralized” blockchain. Block.one’s founders
`
`declared the EOS Blockchain superior to existing cryptocurrency blockchains. Contrary to
`
`Defendants’ false statements, as was slowly revealed throughout the Class Period, the EOS
`
`Blockchain was highly centralized and was not superior to the other blockchains already in use.
`
`11.
`
`Defendants’ efforts to generate demand for, and inflate the price of, the EOS
`
`Securities through their use of false statements were successful. By the end of the offering and sale
`
`of EOS Securities, Block.one raised over $4 billion from investors worldwide, including from the
`
`United States-based investors.
`
`
`
`5
`
`

`

`Case 1:20-cv-03829 Document 1 Filed 05/18/20 Page 6 of 50
`
`
`
`
`12.
`
`On June 8, 2018, Block.one hosted a software developer conference call to discuss
`
`the launch of the EOS Blockchain. A transcript posted on Reddit.com revealed significant
`
`infighting among the developers. The developers could not agree on both large and small issues,
`
`including philosophical questions and arcane technical issues. Some threatened to launch a
`
`competing version of the software.
`
`13.
`
`On June 9, 2018, it was decided that the EOS Blockchain would go live once 15%
`
`of EOS Security holders voted in favor of going live. This prerequisite for going live occurred on
`
`June 14, 2019. However, the launch was not smooth. Almost immediately, users discovered a bug
`
`that caused major glitches, requiring EOS to resort to an earlier version of the code and raising
`
`questions about how much testing was being performed on the new code.
`
`14.
`
`Additional problems soon began to ensue, particularly as users began to discover
`
`that the EOS Blockchain was not, in fact, decentralized, as advertised. On June 22, 2018, it was
`
`reported that EOS block producers froze seven accounts, causing some to question EOS’s
`
`decentralized system and to label the move as “power abuse.”
`
`15.
`
`On November 1, 2018, a blockchain testing company called Whiteblock published
`
`results of the “first independent benchmark testing of the EOS software.” Shockingly, the
`
`investigation concluded that “EOS is not a blockchain,” but “rather a distributed homogenous
`
`database management system,” because its transactions were not “cryptographically validated.” It
`
`further stated that the “foundation of the EOS system is built on a flawed model that is not truly
`
`decentralized.”
`
`16.
`
`On November 15, 2018, Cointelegraph.com published an article titled, “EOS
`
`Proves Yet Again that Decentralization Is Not Its Priority.” It explained that an “arbitrator”
`
`
`
`6
`
`

`

`Case 1:20-cv-03829 Document 1 Filed 05/18/20 Page 7 of 50
`
`
`
`
`reversed a transaction that had been verified. This was described as a “decentralization supporters’
`
`nightmare,” and questioned whether “EOS [is] even trying to be decentralized.”
`
`17.
`
`On June 1, 2019, facing criticism that EOS Blockchain was not decentralized as
`
`promised, Block.one announced that it was shifting gears and developing a social media outlet,
`
`which would be used on its blockchain. News of this divergence did not sit well with investors.
`
`18.
`
`In addition, in early June 2019, Brock Pierce attended the “Tulip Conferenece” in
`
`San Francisco and stated that EOS Blockchain was largely governed by a “Chinese oligarchy.”
`
`19.
`
`On September 30, 2019, the United States Securities and Exchange Commission
`
`(the “SEC”) issued a Cease-and-Desist Order in the Matter of Block.one, ordering the company to
`
`cease and desist its violations of the Securities Act. The SEC has made it clear that the EOS
`
`Securities were securities when issued and should not have been sold (and should not continue to
`
`be sold) without SEC registration or pursuant to an exemption from registration.
`
`20. When the problems underlying the EOS Blockchain became manifest, investors
`
`suffered losses as they watched the price of the EOS Securities decline from a high of $22.89 on
`
`April 29, 2018 to a trading price of $2.66, as of the date of this Complaint.
`
`II.
`
`THE PARTIES
`
`21.
`
`Plaintiff Crypto Assets Opportunity Fund LLC is an entity formed under the laws
`
`of Illinois with principal place of business in Northbrook, Illinois. Crypto Assets Opportunity Fund
`
`LLC purchased the EOS Securities during the Class Period on the secondary market.
`
`22.
`
`Plaintiff Johnny Hong is a resident of Solvang, California. Hong purchased the
`
`EOS Securities during the Class Period on the secondary market.
`
`23.
`
`Defendant Block.one is an entity formed under the laws of the Cayman Islands with
`
`offices, operations, and employees in New York City, California, Virginia, and Hong Kong.
`
`
`
`7
`
`

`

`Case 1:20-cv-03829 Document 1 Filed 05/18/20 Page 8 of 50
`
`
`
`
`24.
`
`Block.one is operated and owned by a small group of individuals who were
`
`instrumental in Block.one’s widespread misconduct, described below in paragraphs 25-28 (the
`
`“Individual Defendants”).
`
`25.
`
`Defendant Brendan Blumer is a co-founder and CEO of Block.one. He was integral
`
`to the marketing of Block.one’s EOS Securities. Blumer resides in Hong Kong.
`
`26.
`
`Defendant Daniel Larimer is a co-founder and Chief Technology Officer (“CTO”)
`
`of Block.one. He was integral to the marketing of Block.one’s EOS Securities. Larimer resides in
`
`Blacksburg, Virginia.
`
`27.
`
`Defendant Ian Grigg is a former partner of Block.one. He disseminated information
`
`about EOS Securities to the general public to drive demand and increase price. Grigg resides in
`
`Hong Kong.
`
`28.
`
`Defendant Brock Pierce is a co-founder and former partner of Block.one. He is a
`
`former child actor and prominent bitcoin investor who talked often about Block.one at conferences
`
`and promotional videos. Pierce resides in Puerto Rico.
`
`III.
`
`JURISDICTION AND VENUE
`
`29.
`
`This Court has original jurisdiction over Plaintiffs’ federal securities laws claims
`
`pursuant to 28 U.S.C. §§1331, 1337, 15 U.S.C. §77v and Section 27 of the Exchange Act (15
`
`U.S.C. §§78aa).
`
`30.
`
`Venue lies within this District under Section 22 of the Securities Act (15 U.S.C.
`
`§77v(a)), Section 27 of the Exchange Act (15 U.S.C. §78aa) and 15 U.S.C. §22, 18 U.S.C. §1965,
`
`and 28 U.S.C. §1391(b) because Defendants resided, transacted business, were found, or had
`
`agents in this District, and a substantial portion of the alleged activity affected interstate trade and
`
`commerce in New York City.
`
`
`
`8
`
`

`

`Case 1:20-cv-03829 Document 1 Filed 05/18/20 Page 9 of 50
`
`
`
`
`31.
`
`During the Class Period, Defendants used the instrumentalities of interstate
`
`commerce, including interstate wires, to effectuate their illegal scheme.
`
`32.
`
`Defendants’ willful violations of securities law and other unlawful conduct alleged
`
`herein had direct, substantial, and reasonably foreseeable effects on U.S. domestic commerce, and
`
`such effects give rise to Plaintiffs’ claims within the meaning of 15 U.S.C. §6a.
`
`33.
`
`This Court has personal jurisdiction over Defendants because each Defendant
`
`transacted business, promoted the offering of EOS Securities, maintained substantial contacts,
`
`and/or they or their co-conspirators committed overt acts in furtherance of their illegal conspiracy
`
`and breach of fiduciary duty in the United States, including in this District. The scheme was
`
`directed at, and had the intended effect of, causing injury to persons residing in, located in, or
`
`doing business in New York City.
`
`34.
`
`Personal jurisdiction over all Defendants comports with the United States
`
`Constitution and the New York long-arm statute, N.Y. C.P.L.R. §302.
`
`IV.
`
`BACKGROUND FACTS
`
`A.
`
`35.
`
`Cryptocurrencies and Blockchain Technology
`
`Cryptocurrencies are digital assets that act as a medium of exchange or a store of
`
`value, or both. They are designed to secure transactions, control the creation of additional units,
`
`and verify the transfer of the underlying digital assets. Bitcoin was the world’s first, and most
`
`popular, cryptocurrency. It currently has a market capitalization of approximately $126 billion,
`
`and investor enthusiasm surrounding bitcoin has generated a broad market for other
`
`cryptocurrencies with some varying features.
`
`
`
`9
`
`

`

`Case 1:20-cv-03829 Document 1 Filed 05/18/20 Page 10 of 50
`
`
`
`
`36.
`
`The core technical feature of most cryptocurrencies is the “blockchain,” which is
`
`essentially a ledger that tracks ownership and transfer of the cryptocurrency at issue. As the SEC
`
`explained in a July 2017 investor bulletin:
`
`A blockchain is an electronic distributed ledger or list of entries – much like
`a stock ledger – that is maintained by various participants in a network of
`computers. Blockchains use cryptography to process and verify transactions
`on the ledger, providing comfort to users and potential users of the
`blockchain that entries are secure.
`
`Information held on a blockchain exists as a shared and continually reconciled database. The
`
`blockchain database is not stored in any single location; rather, it is distributed – or decentralized
`
`– because it is hosted and perpetuated by millions of computer “nodes” around the globe. This
`
`means that, for a widely distributed blockchain network, it would be extremely difficult, if not
`
`impossible, to submit a false or malicious transaction because a malicious actor would have to gain
`
`control of the majority of the nodes on the blockchain to achieve its purpose. Once a transaction
`
`is recorded on the blockchain, it cannot be cancelled, changed, or reversed, and all transaction
`
`records are available all the way back to the blockchain’s inception.
`
`37.
`
`Each blockchain is subject to different technical rules devised by their creators, but
`
`they all seek to attain the goal of decentralization. To achieve this, they provide a framework of
`
`incentives to encourage users to do the work of validating transactions, which often requires
`
`significant computational mechanics. This has the effect of making the blockchain more accurate
`
`and secure. In the instance of Bitcoin network, users who validate transactions on the Bitcoin
`
`blockchain are rewarded with newly minted bitcoin. This process is referred to as “mining,” and
`
`those who validate information in exchange for bitcoin are thus called “miners.”
`
`
`
`10
`
`

`

`Case 1:20-cv-03829 Document 1 Filed 05/18/20 Page 11 of 50
`
`
`
`
`38.
`
`Those who do not acquire bitcoin through mining may purchase it through an online
`
`cryptocurrency exchange. These exchanges provide a convenient and accessible marketplace for
`
`buyers and sellers to meet and transact, similar to traditional exchanges.
`
`39.
`
`Ethereum is another type of blockchain, and it functions similarly to the Bitcoin
`
`blockchain with regard to miners’ validation of the network, except in this case, they are rewarded
`
`with newly minted ether. Ethereum differs from Bitcoin, however, because it enables “smart
`
`contracts,” which are programs that verify and enforce the negotiation or performance of binary
`
`contracts. They are thus self-executing and self-enforcing, making the transactions more secure
`
`and less costly.
`
`40.
`
`To understand a smart contract in more concrete terms, consider a hedging contract.
`
`Each party may dedicate $1,000 worth of ether, and at the end of the month, one will receive back
`
`$1,000 of ether at the dollar exchange rate, while the other receives the remainder of the ether.
`
`Depending on whether ether’s value has increased, the party receiving the remainder of the ether
`
`may have an asset worth more or less than the $1,000 originally committed. A smart contract
`
`enables these parties to submit the ether to a secure destination, which will automatically distribute
`
`the ether in accordance with the terms of the hedging contract at the end of the month, without any
`
`third-party action.
`
`41.
`
`To facilitate widespread adoption of smart contracts, the Ethereum community has
`
`developed Ethereum Request for Comments (“ERCs”). ERCs are application standards and may
`
`be created by anyone. If an ERC is adopted by the Ethereum community, it provides for uniform
`
`transactions, reduced risk, and efficient processes. The most widespread use of ERCs is to allow
`
`individuals to create and launch new digital tokens.
`
`
`
`11
`
`

`

`Case 1:20-cv-03829 Document 1 Filed 05/18/20 Page 12 of 50
`
`
`
`
`42.
`
`ERC-20 is an application standard that the creator of Ethereum, Vitalik Buterin,
`
`first proposed in 2015. ERC-20 allows for the creation of smart-contract tokens on the Ethereum
`
`blockchain, known as ERC-20 tokens. A key distinguishing feature of ERC-20 tokens is that they
`
`do not operate on their own, independent blockchain; instead, they operate on the Ethereum
`
`blockchain. Certain features of the many varieties of ERC-20 tokens vary, such as the total supply
`
`and ticker symbol, but they are all compliant with the ERC-20 application standard. Because they
`
`are easy to create and deploy, anyone with a basic understanding of Ethereum can create ERC-20
`
`tokens and sell them to investors. The EOS Securities at issue in this lawsuit began as ERC-20
`
`tokens.
`
`B.
`
`43.
`
`The EOS Project and Resultant ICO
`
`Investor demand for cryptocurrencies had initially fluctuated, but by the end of
`
`2016, was growing at an unprecedented rate. ICOs became a popular way for entrepreneurs to
`
`capitalize on this unbridled enthusiasm.
`
`44.
`
`ICOs are typically announced and promoted via online public channels and social
`
`media, including the issuer’s website and popular online forums such as bitcointalk.org, Reddit,
`
`Twitter, Telegram channels, and others. Many of these postings encouraged trading in
`
`cryptocurrencies, such as EOS, for profit. After the completion of the issuance, the issuer would
`
`deliver its tokens to the participant’s unique address on the blockchain.
`
`45.
`
`In advance of the ICO, issuers typically release technical white papers and other
`
`marketing materials that describe the new, revolutionary blockchain architecture and the terms of
`
`the issuance. None of those materials typically cover the information required to be included in a
`
`registration statement filed with the SEC, such as a plain English description of the offering, key
`
`risk factors, and description of important information and management incentives.
`
`
`
`12
`
`

`

`Case 1:20-cv-03829 Document 1 Filed 05/18/20 Page 13 of 50
`
`
`
`
`46.
`
`The overwhelming majority of ICOs sold ERC-20 tokens, such as the EOS
`
`Securities at issue here.
`
`47.
`
`In May 2017, Block.one announced its existence and purpose: to generate a
`
`superior decentralized EOS Blockchain. This news was heralded with much fanfare through a
`
`series of conferences and events attended by Block.one, including the flagship Consensus
`
`Conference in New York City on May 22, 2017. The New York conference was punctuated by a
`
`large billboard sign prominently displayed in Times Square:
`
`
`On June 5, 2017, Block.one released The EOS.IO Technical White Paper (the
`
`48.
`
`“EOSIO White Paper”), authored by Daniel Larimer, describing the concept for the EOSIO
`
`blockchain:
`
`The EOS.IO software introduces a new blockchain architecture designed
`to enable vertical and horizontal scaling of decentralized applications.
`This is achieved by creating an operating system-like construct upon which
`applications can be built. The software provides accounts, authentication,
`databases, asynchronous communication and the scheduling of applications
`across hundreds of CPU cores or clusters. The resulting technology is a
`blockchain architecture that scales to millions of transactions per second,
`eliminates user fees, and allows for quick and easy deployment of
`decentralized applications.
`
`
`
`13
`
`

`

`Case 1:20-cv-03829 Document 1 Filed 05/18/20 Page 14 of 50
`
`
`
`
`49.
`
`In July 2017, Ian Grigg (former Block.one partner) published EOS – An
`
`Introduction, describing EOSIO as “a performance-based and self-governing blockchain that
`
`provides an operating system for building large-scale consumer-facing distributed applications.”
`
`The publication explains the purpose and technology behind the EOS project and sets forth
`
`Block.one’s vision to launch a competitor to the Bitcoin and Ethereum blockchains, intended to
`
`solve many of the problems faced by those popular iterations of the blockchain technology.
`
`EOSIO was pitched by Block.one as intended for “high-performance messaging with business
`
`logic. Popular use cases will include supply chain, resource management, user-messaging such as
`
`social media, asset issuance and trading, accounting for remittances, and gaming.”
`
`50.
`
`To develop and launch EOSIO, Block.one raised capital by selling 900 million EOS
`
`Securities via an ICO of the EOS Securities at issue here. The ICO took place from June 26, 2017
`
`to June 1, 2018. 200 million EOS Securities were sold in the first five days of the ICO, with an
`
`additional 700 million EOS Securities sold in two million increments every 23 hours thereafter.
`
`Block.one retained 100 million EOS Securities.
`
`51.
`
`As was typical for ICO issuers at that time, Block.one did not provide any
`
`information that is usually disclosed in connection with an initial offering of securities. Its 14-page
`
`white paper posted on the website described new software that promised to handle millions of
`
`transactions per second and linked to videos and blog posts describing how the company could use
`
`bitcoin’s decentralized “blockchain” technology for various purposes, but it did not explain how
`
`the proceeds from the ICO would accomplish those goals, or even if they would be used to develop
`
`the new blockchain software.
`
`52.
`
`From June 26, 2017 to June 1, 2018, Defendants marketed one billion EOS
`
`Securities to the general public purportedly pursuant to an “EOS Token Purchase Agreement.” To
`
`
`
`14
`
`

`

`Case 1:20-cv-03829 Document 1 Filed 05/18/20 Page 15 of 50
`
`
`
`
`participate in the token sale, the purchasers of EOS Securities transferred their funds to the public
`
`sale contract address. From there, Block.one then transferred funds to the presumably more secure
`
`“funding wallet,” owned by Block.one.
`
`53.
`
`In a typical ICO, the funds stay in the funding wallet until after the ICO ends.
`
`Issuers often spent the time between the end of the token sale and the first withdrawal of funds
`
`performing crucial tasks like setting up the company to receive the funds, ensuring know-your-
`
`customer (“KYC”) on all contributors, or working with exchanges to make tokens available for
`
`trading. After the end of the ICO, the company typically transfers the contributed funds from the
`
`designated funding wallet to other accounts.
`
`54.
`
`Block.one’s ICO did not follow this usual pattern. Instead, throughout the duration
`
`of the EOS ICO, Defendants continuously withdrew funds from the funding wallet, beginning as
`
`early as five days after the beginning of the ICO. In total, Defendants permitted the funds to be
`
`withdrawn nearly a hundred times, accounting for close to 90% of the total funds raised throughout
`
`the ICO period and averaging one withdrawal every 3-4 days.
`
`55. While withdrawal of funds during an ICO is not expressly prohibited, there are
`
`significant concerns about how the withdrawn funds might be used, e.g., to buy tokens on
`
`cryptocurrency exchanges, resulting in artificially inflated demand for EOS, increasing market
`
`price, and fueling speculation and interest in the sale. Thus, there was some concern over
`
`Block.one’s withdrawal of funds. Responding to these concerns, Block.one announced in August
`
`2017 that it was “finalizing an engagement with a third-party auditor to release a public audit
`
`designed to provide comfort that block.one has not participated in the EOS token sale in anyway
`
`[sic], with any funds.” Yet, no audit report has been made public, despite the ease of doing so with
`
`the transaction records that the blockchain inherently provides.
`
`
`
`15
`
`

`

`Case 1:20-cv-03829 Document 1 Filed 05/18/20 Page 16 of 50
`
`
`
`
`56.
`
`At the conclusion of the ICO in June 2018, Block.one raised over $4 billion, which
`
`it classified as “revenue of block.one.”
`
`C. Defendants Aggressively Marketed EOS Securities in the United States
`
`57.
`
`From 2017 through the present, to drive demand for EOS Securities, Defendants
`
`have aggressively courted investors throughout the United States. Block.one first announced itself
`
`at a May 2017 conference in New York City, and punctuated its arrival with expensive ad space
`
`on a Times Square billboard.
`
`
`
`58.
`
`Block.one’s executives and representatives, including, but not limited to, Pierce,
`
`Blumer, and Larimer, have spoken at myriad conferences and met potential investors at informal
`
`meetups, including in New York. For example, on May 22, 2017, Larimer and Blumer discussed
`
`EOSIO software and EOS token distribution as speakers at Consensus, a blockchain industry
`
`conference in New York City, and hosted a post-conference reception.
`
`59.
`
` Block.one also promoted its proposed business and ICO to U.S.-based persons on
`
`the EOS.IO website and through various social media and forum posts. The EOS.IO website,
`
`White Paper, and other promotional statements were accessible to purchasers and potential
`
`purchasers, and viewable by U.S. persons.
`
`60.
`
`Block.one released the White Paper on June 5, 2017, which included a section
`
`called, “Governance,” which promised that “power [would] originate[] with the token holders who
`
`delegate [their] power to block producers.” The block producers would be “given limited and
`
`checked authority to freeze accounts, update defective applications, and propose hard forking
`
`changes to the underlying protocol.” Users were also required to sign a “constitution,” which
`
`included a detailed protocol for changing the constitution and any source code. These are key
`
`features that underscore the purported “decentralized” nature of the EOS Blockchain.
`
`
`
`16
`
`

`

`Case 1:20-cv-03829 Document 1 Filed 05/18/20 Page 17 of 50
`
`
`
`
`61.
`
`On March 12, 2018, before Defendants had any functional software, former
`
`Block.one partner Brock Pierce said about EOS:
`
`Everything will be better, faster, and cheaper. Everything will be
`more connected. Everything will be more trustworthy. Everything
`will be more secure. Everything that exists is no longer going to exist
`in the way that it does today. Everything in this world is about to get
`better.
`
`62.
`
`On May 3, 2018, in a video titled “The Story of the EOSIO Brand,” Brendan
`
`Blumer said about Block.one: “We build practical blockchain solutions that are designed to
`
`interact with humanity in a way that takes into account the way that we really operate.”
`
`63.
`
`Defendants worked cooperatively to promote EOSIO as the next, superior version
`
`of the existing blockchains, like Bitcoin and Ethereum. To highlight the superiority of the EOS
`
`Blockchain, Defendants told prospective investors that “EOS” stood for “Ethereum on steroids.”
`
`64.
`
`In an interview with Roanoke Times in early 2018, Daniel Larimer said – without a
`
`hint of hyperbole in his voice – “[EOS] will be better than bitcoin and all the rest. EOS could
`
`fundamentally change the way society operates.” Despite announcing its grandiose plans to create
`
`world-changing tools, Block.one declined to reveal more details “to prevent copycats.”
`
`65.
`
`Block.one further promoted EOS Securities by publicizing a series of equity
`
`investments in Block.one by prominent institutional and high-net-worth individual investors like
`
`PayPal’s founder Peter Thiel, Jihan Wu of crypto mining hardware giant Bitmain, Alan Howard,
`
`Louis Bacon, Christian Angermayer, Lansdowne Investment Company, and Galaxy Digital’s
`
`Mike Novogratz. By publicizing the news, Block.one suggested that those investors’ interest in
`
`owning Block.one’s equity reflected on the value of EOS Securities. Those investors, however,
`
`did not purchase EOS Securities; instead, they purchased shares in the entity that recorded over $4
`
`billion in revenue from the sa