`
`
`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
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`
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`Case 1:20-cv-03829 Document 1 Filed 05/18/20 Page 2 of 50
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`
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`Plaintiffs Crypto Assets Opportunity Fund LLC and Johnny Hong, together and on behalf
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`of all others similarly situated, by their undersigned attorneys, bring this action against Defendants
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`Block.one, Brendan Blumer, Daniel Larimer, Ian Grigg, and Brock Pierce (collectively,
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`“Defendants”). With knowledge of their own acts and acts taking place in their presence, and upon
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`information and belief as to all other matters, Plaintiffs allege the following:
`
`I.
`
`1.
`
`SUMMARY OF THE ACTION
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`This is a federal securities class action that asserts claims under the Securities Act
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`of 1933 (the “Securities Act”) and the Exchange Act of 1934 (the “Exchange Act”). This action
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`is brought on behalf of all investors who purchased securities issued by Block.one called “EOS
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`Tokens” (the “EOS Securities”) during the period of June 26, 2017 to the present (the “Class
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`Period”). This action asserts claims arising under Sections 5 and 12(a)(1) of the Securities Act for
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`failure to register the EOS Securities pursuant to the federal securities laws; Section 12(a)(2) of
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`the Securities Act for issuing the EOS Securities pursuant to a materially false and misleading
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`prospectus; Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder for
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`disseminating materially false and misleading statements concerning the EOS Securities during
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`the Class Period; and Section 15 of the Securities Act and Section 20(a) of the Exchange Act for
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`control person liability.
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`2.
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`This case arises out of a fraudulent scheme, fueled by a global frenzy over
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`cryptocurrencies and unchecked human greed, to raise billions of dollars through sales of a
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`cryptocurrency called EOS – an unregistered security – to investors in violation of the United
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`States federal securities laws. To drive the demand for and increase profit from the sales of EOS
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`Securities, Defendants further violated the securities laws by making materially false and
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`2
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`Case 1:20-cv-03829 Document 1 Filed 05/18/20 Page 3 of 50
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`misleading statements about EOS, which artificially inflated the prices for the EOS Securities and
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`damaged unsuspecting investors.
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`3.
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`Block.one was founded in early 2017 by Brock Pierce, Brendan Blumer, and Daniel
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`Larimer. They sought to capitalize on the investor fervor for cryptocurrencies by promising that
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`they would develop software to run a new highly decentralized blockchain (the “EOS
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`Blockchain”). Blockchains are ledgers that record digital transactions between two parties.
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`Access rights to the assets in those transactions are represented by cryptographic tokens, which are
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`commonly referred to as “cryptocurrency.” The most prominent cryptocurrency is bitcoin, but
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`many others exist, including ether.
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`4.
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`The most important feature of blockchains is that they are “decentralized.”
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`Centralized platforms are controlled by a centralized authority. Some prominent digital examples
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`are Yahoo! and Facebook. The centralized authority has the power to collect and store user data,
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`can set the rules of engagement for the platform, and can make unilateral determinations that affect
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`all users. Centralization requires inherent trust in the central authority controlling the platform,
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`including that it will ensure that users’ data remains secure. But since all the information flows
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`through a single, central authority, centralized platforms are relatively easy to hack.
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`5.
`
`Decentralized systems spread the power and authority among many users. The
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`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
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`information, and information flows directly from person to person, rather than through a
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`centralized authority. The main benefits are efficiency (from the elimination of transaction
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`intermediaries); transparency (from ability to access entire record of transactions by any user); and
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`security (from lack of central point of failure).
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`6.
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`Decentralization occurs in degrees, and Block.one hyped its ability to create a more
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`decentralized system that was superior to the blockchains already in existence: the EOS
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`Blockchain. In order to fund the development of software that would underlie its new blockchain
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`(i.e., the “EOSIO software”), Block.one began to devise a plan to offer and sell EOS Securities in
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`an “initial coin offering,” or “ICO.” Defendants first publicly announced this plan on or about
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`May 22, 2017, at a conference in New York City. The announcement was accompanied by a
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`flashy, expensive ad purchase on a large billboard overlooking Times Square.
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`7.
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`On June 5, 2017, Block.one published a White Paper, which touted “a new
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`blockchain architecture designed to enable vertical and horizontal scaling of decentralized
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`applications. This is achieved by creating an operating system-like construct upon which
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`applications can be built. . . . The resulting technology is a blockchain architecture that may
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`ultimately scale to millions of transactions per second, eliminates user fees, and allows for quick
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`and easy deployment and maintenance of decentralized applications, in the context of a governed
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`blockchain.” The White Paper included a section called “Governance,” which highlighted the
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`features that purportedly would enhance decentralization of the EOS Blockchain.
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`8.
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`On June 26, 2017, Defendants began selling the EOS Securities in a year-long ICO
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`aimed at both wealthy investors and the general public. Block.one kept 10 percent of the EOS
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`Securities for itself and solicited online exchanges of digital assets (known as “cryptocurrency
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`exchanges”) to list EOS Securities on their platforms and encourage purchases by a wide universe
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`of investors. Block.one offered and sold EOS Securities using the “EOS Purchase Agreement,”
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`which did not comply with the requirements for a registered offering of securities, nor did the EOS
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`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
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`4
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`Case 1:20-cv-03829 Document 1 Filed 05/18/20 Page 5 of 50
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`information to purchasers of EOS Securities, such as information about Block.one’s financial
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`condition, future plans of operation and budget, the proposed uses of investor proceeds, and
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`detailed disclosures of material trends and the most significant factors that made the ICO
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`speculative and risky. Block.one thus failed to disclose information that was relevant to investors’
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`evaluation of Block.one’s promises about the EOS Securities and EOSIO software.
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`9.
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`Following their initial sale, the EOS Securities also traded in a secondary market,
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`including on the U.S. exchanges Coinbase and Kraken, which are cryptocurrency trading
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`platforms. Since July 2017, just one month after the start of its public sale of EOS Securities, EOS
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`has been trading on these exchanges, soaring to a high of $22.89 on April 29, 2018.
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`10. While Block.one did not provide a registration statement, the Individual
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`Defendants, who promoted the sale of the EOS Securities, made dozens of materially false and
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`misleading statements to induce investors to purchase the EOS Securities. These statements were
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`disseminated both prior to the launch of the ICO and throughout its duration, inflating the price of
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`the EOS Securities sold both in the ICO and on the secondary market. The false statements
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`concerned the capabilities of the anticipated EOSIO software that Block.one was developing,
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`including in particular its ability to support a “decentralized” blockchain. Block.one’s founders
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`declared the EOS Blockchain superior to existing cryptocurrency blockchains. Contrary to
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`Defendants’ false statements, as was slowly revealed throughout the Class Period, the EOS
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`Blockchain was highly centralized and was not superior to the other blockchains already in use.
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`11.
`
`Defendants’ efforts to generate demand for, and inflate the price of, the EOS
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`Securities through their use of false statements were successful. By the end of the offering and sale
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`of EOS Securities, Block.one raised over $4 billion from investors worldwide, including from the
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`United States-based investors.
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`12.
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`On June 8, 2018, Block.one hosted a software developer conference call to discuss
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`the launch of the EOS Blockchain. A transcript posted on Reddit.com revealed significant
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`infighting among the developers. The developers could not agree on both large and small issues,
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`including philosophical questions and arcane technical issues. Some threatened to launch a
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`competing version of the software.
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`13.
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`On June 9, 2018, it was decided that the EOS Blockchain would go live once 15%
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`of EOS Security holders voted in favor of going live. This prerequisite for going live occurred on
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`June 14, 2019. However, the launch was not smooth. Almost immediately, users discovered a bug
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`that caused major glitches, requiring EOS to resort to an earlier version of the code and raising
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`questions about how much testing was being performed on the new code.
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`14.
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`Additional problems soon began to ensue, particularly as users began to discover
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`that the EOS Blockchain was not, in fact, decentralized, as advertised. On June 22, 2018, it was
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`reported that EOS block producers froze seven accounts, causing some to question EOS’s
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`decentralized system and to label the move as “power abuse.”
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`15.
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`On November 1, 2018, a blockchain testing company called Whiteblock published
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`results of the “first independent benchmark testing of the EOS software.” Shockingly, the
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`investigation concluded that “EOS is not a blockchain,” but “rather a distributed homogenous
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`database management system,” because its transactions were not “cryptographically validated.” It
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`further stated that the “foundation of the EOS system is built on a flawed model that is not truly
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`decentralized.”
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`16.
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`On November 15, 2018, Cointelegraph.com published an article titled, “EOS
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`Proves Yet Again that Decentralization Is Not Its Priority.” It explained that an “arbitrator”
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`reversed a transaction that had been verified. This was described as a “decentralization supporters’
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`nightmare,” and questioned whether “EOS [is] even trying to be decentralized.”
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`17.
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`On June 1, 2019, facing criticism that EOS Blockchain was not decentralized as
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`promised, Block.one announced that it was shifting gears and developing a social media outlet,
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`which would be used on its blockchain. News of this divergence did not sit well with investors.
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`18.
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`In addition, in early June 2019, Brock Pierce attended the “Tulip Conferenece” in
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`San Francisco and stated that EOS Blockchain was largely governed by a “Chinese oligarchy.”
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`19.
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`On September 30, 2019, the United States Securities and Exchange Commission
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`(the “SEC”) issued a Cease-and-Desist Order in the Matter of Block.one, ordering the company to
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`cease and desist its violations of the Securities Act. The SEC has made it clear that the EOS
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`Securities were securities when issued and should not have been sold (and should not continue to
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`be sold) without SEC registration or pursuant to an exemption from registration.
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`20. When the problems underlying the EOS Blockchain became manifest, investors
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`suffered losses as they watched the price of the EOS Securities decline from a high of $22.89 on
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`April 29, 2018 to a trading price of $2.66, as of the date of this Complaint.
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`II.
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`THE PARTIES
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`21.
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`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
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`LLC purchased the EOS Securities during the Class Period on the secondary market.
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`22.
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`Plaintiff Johnny Hong is a resident of Solvang, California. Hong purchased the
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`EOS Securities during the Class Period on the secondary market.
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`23.
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`Defendant Block.one is an entity formed under the laws of the Cayman Islands with
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`offices, operations, and employees in New York City, California, Virginia, and Hong Kong.
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`24.
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`Block.one is operated and owned by a small group of individuals who were
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`instrumental in Block.one’s widespread misconduct, described below in paragraphs 25-28 (the
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`“Individual Defendants”).
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`25.
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`Defendant Brendan Blumer is a co-founder and CEO of Block.one. He was integral
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`to the marketing of Block.one’s EOS Securities. Blumer resides in Hong Kong.
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`26.
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`Defendant Daniel Larimer is a co-founder and Chief Technology Officer (“CTO”)
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`of Block.one. He was integral to the marketing of Block.one’s EOS Securities. Larimer resides in
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`Blacksburg, Virginia.
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`27.
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`Defendant Ian Grigg is a former partner of Block.one. He disseminated information
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`about EOS Securities to the general public to drive demand and increase price. Grigg resides in
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`Hong Kong.
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`28.
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`Defendant Brock Pierce is a co-founder and former partner of Block.one. He is a
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`former child actor and prominent bitcoin investor who talked often about Block.one at conferences
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`and promotional videos. Pierce resides in Puerto Rico.
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`III.
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`JURISDICTION AND VENUE
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`29.
`
`This Court has original jurisdiction over Plaintiffs’ federal securities laws claims
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`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.
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`Venue lies within this District under Section 22 of the Securities Act (15 U.S.C.
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`§77v(a)), Section 27 of the Exchange Act (15 U.S.C. §78aa) and 15 U.S.C. §22, 18 U.S.C. §1965,
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`and 28 U.S.C. §1391(b) because Defendants resided, transacted business, were found, or had
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`agents in this District, and a substantial portion of the alleged activity affected interstate trade and
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`commerce in New York City.
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`31.
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`During the Class Period, Defendants used the instrumentalities of interstate
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`commerce, including interstate wires, to effectuate their illegal scheme.
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`32.
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`Defendants’ willful violations of securities law and other unlawful conduct alleged
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`herein had direct, substantial, and reasonably foreseeable effects on U.S. domestic commerce, and
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`such effects give rise to Plaintiffs’ claims within the meaning of 15 U.S.C. §6a.
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`33.
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`This Court has personal jurisdiction over Defendants because each Defendant
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`transacted business, promoted the offering of EOS Securities, maintained substantial contacts,
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`and/or they or their co-conspirators committed overt acts in furtherance of their illegal conspiracy
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`and breach of fiduciary duty in the United States, including in this District. The scheme was
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`directed at, and had the intended effect of, causing injury to persons residing in, located in, or
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`doing business in New York City.
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`34.
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`Personal jurisdiction over all Defendants comports with the United States
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`Constitution and the New York long-arm statute, N.Y. C.P.L.R. §302.
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`IV.
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`BACKGROUND FACTS
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`A.
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`35.
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`Cryptocurrencies and Blockchain Technology
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`Cryptocurrencies are digital assets that act as a medium of exchange or a store of
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`value, or both. They are designed to secure transactions, control the creation of additional units,
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`and verify the transfer of the underlying digital assets. Bitcoin was the world’s first, and most
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`popular, cryptocurrency. It currently has a market capitalization of approximately $126 billion,
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`and investor enthusiasm surrounding bitcoin has generated a broad market for other
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`cryptocurrencies with some varying features.
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`36.
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`The core technical feature of most cryptocurrencies is the “blockchain,” which is
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`essentially a ledger that tracks ownership and transfer of the cryptocurrency at issue. As the SEC
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`explained in a July 2017 investor bulletin:
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`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.
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`Information held on a blockchain exists as a shared and continually reconciled database. The
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`blockchain database is not stored in any single location; rather, it is distributed – or decentralized
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`– because it is hosted and perpetuated by millions of computer “nodes” around the globe. This
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`means that, for a widely distributed blockchain network, it would be extremely difficult, if not
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`impossible, to submit a false or malicious transaction because a malicious actor would have to gain
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`control of the majority of the nodes on the blockchain to achieve its purpose. Once a transaction
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`is recorded on the blockchain, it cannot be cancelled, changed, or reversed, and all transaction
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`records are available all the way back to the blockchain’s inception.
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`37.
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`Each blockchain is subject to different technical rules devised by their creators, but
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`they all seek to attain the goal of decentralization. To achieve this, they provide a framework of
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`incentives to encourage users to do the work of validating transactions, which often requires
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`significant computational mechanics. This has the effect of making the blockchain more accurate
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`and secure. In the instance of Bitcoin network, users who validate transactions on the Bitcoin
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`blockchain are rewarded with newly minted bitcoin. This process is referred to as “mining,” and
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`those who validate information in exchange for bitcoin are thus called “miners.”
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`38.
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`Those who do not acquire bitcoin through mining may purchase it through an online
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`cryptocurrency exchange. These exchanges provide a convenient and accessible marketplace for
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`buyers and sellers to meet and transact, similar to traditional exchanges.
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`39.
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`Ethereum is another type of blockchain, and it functions similarly to the Bitcoin
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`blockchain with regard to miners’ validation of the network, except in this case, they are rewarded
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`with newly minted ether. Ethereum differs from Bitcoin, however, because it enables “smart
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`contracts,” which are programs that verify and enforce the negotiation or performance of binary
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`contracts. They are thus self-executing and self-enforcing, making the transactions more secure
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`and less costly.
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`40.
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`To understand a smart contract in more concrete terms, consider a hedging contract.
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`Each party may dedicate $1,000 worth of ether, and at the end of the month, one will receive back
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`$1,000 of ether at the dollar exchange rate, while the other receives the remainder of the ether.
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`Depending on whether ether’s value has increased, the party receiving the remainder of the ether
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`may have an asset worth more or less than the $1,000 originally committed. A smart contract
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`enables these parties to submit the ether to a secure destination, which will automatically distribute
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`the ether in accordance with the terms of the hedging contract at the end of the month, without any
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`third-party action.
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`41.
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`To facilitate widespread adoption of smart contracts, the Ethereum community has
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`developed Ethereum Request for Comments (“ERCs”). ERCs are application standards and may
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`be created by anyone. If an ERC is adopted by the Ethereum community, it provides for uniform
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`transactions, reduced risk, and efficient processes. The most widespread use of ERCs is to allow
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`individuals to create and launch new digital tokens.
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`42.
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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 allows for the creation of smart-contract tokens on the Ethereum
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`blockchain, known as ERC-20 tokens. A key distinguishing feature of ERC-20 tokens is that they
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`do not operate on their own, independent blockchain; instead, they operate on the Ethereum
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`blockchain. Certain features of the many varieties of ERC-20 tokens vary, such as the total supply
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`and ticker symbol, but they are all compliant with the ERC-20 application standard. Because they
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`are easy to create and deploy, anyone with a basic understanding of Ethereum can create ERC-20
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`tokens and sell them to investors. The EOS Securities at issue in this lawsuit began as ERC-20
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`tokens.
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`B.
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`43.
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`The EOS Project and Resultant ICO
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`Investor demand for cryptocurrencies had initially fluctuated, but by the end of
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`2016, was growing at an unprecedented rate. ICOs became a popular way for entrepreneurs to
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`capitalize on this unbridled enthusiasm.
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`44.
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`ICOs are typically announced and promoted via online public channels and social
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`media, including the issuer’s website and popular online forums such as bitcointalk.org, Reddit,
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`Twitter, Telegram channels, and others. Many of these postings encouraged trading in
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`cryptocurrencies, such as EOS, for profit. After the completion of the issuance, the issuer would
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`deliver its tokens to the participant’s unique address on the blockchain.
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`45.
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`In advance of the ICO, issuers typically release technical white papers and other
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`marketing materials that describe the new, revolutionary blockchain architecture and the terms of
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`the issuance. None of those materials typically cover the information required to be included in a
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`registration statement filed with the SEC, such as a plain English description of the offering, key
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`risk factors, and description of important information and management incentives.
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`46.
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`The overwhelming majority of ICOs sold ERC-20 tokens, such as the EOS
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`Securities at issue here.
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`47.
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`In May 2017, Block.one announced its existence and purpose: to generate a
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`superior decentralized EOS Blockchain. This news was heralded with much fanfare through a
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`series of conferences and events attended by Block.one, including the flagship Consensus
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`Conference in New York City on May 22, 2017. The New York conference was punctuated by a
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`large billboard sign prominently displayed in Times Square:
`
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`On June 5, 2017, Block.one released The EOS.IO Technical White Paper (the
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`48.
`
`“EOSIO White Paper”), authored by Daniel Larimer, describing the concept for the EOSIO
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`blockchain:
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`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.
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`49.
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`In July 2017, Ian Grigg (former Block.one partner) published EOS – An
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`Introduction, describing EOSIO as “a performance-based and self-governing blockchain that
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`provides an operating system for building large-scale consumer-facing distributed applications.”
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`The publication explains the purpose and technology behind the EOS project and sets forth
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`Block.one’s vision to launch a competitor to the Bitcoin and Ethereum blockchains, intended to
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`solve many of the problems faced by those popular iterations of the blockchain technology.
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`EOSIO was pitched by Block.one as intended for “high-performance messaging with business
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`logic. Popular use cases will include supply chain, resource management, user-messaging such as
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`social media, asset issuance and trading, accounting for remittances, and gaming.”
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`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
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`additional 700 million EOS Securities sold in two million increments every 23 hours thereafter.
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`Block.one retained 100 million EOS Securities.
`
`51.
`
`As was typical for ICO issuers at that time, Block.one did not provide any
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`information that is usually disclosed in connection with an initial offering of securities. Its 14-page
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`white paper posted on the website described new software that promised to handle millions of
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`transactions per second and linked to videos and blog posts describing how the company could use
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`bitcoin’s decentralized “blockchain” technology for various purposes, but it did not explain how
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`the proceeds from the ICO would accomplish those goals, or even if they would be used to develop
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`the new blockchain software.
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`52.
`
`From June 26, 2017 to June 1, 2018, Defendants marketed one billion EOS
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`Securities to the general public purportedly pursuant to an “EOS Token Purchase Agreement.” To
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`participate in the token sale, the purchasers of EOS Securities transferred their funds to the public
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`sale contract address. From there, Block.one then transferred funds to the presumably more secure
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`“funding wallet,” owned by Block.one.
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`53.
`
`In a typical ICO, the funds stay in the funding wallet until after the ICO ends.
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`Issuers often spent the time between the end of the token sale and the first withdrawal of funds
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`performing crucial tasks like setting up the company to receive the funds, ensuring know-your-
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`customer (“KYC”) on all contributors, or working with exchanges to make tokens available for
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`trading. After the end of the ICO, the company typically transfers the contributed funds from the
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`designated funding wallet to other accounts.
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`54.
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`Block.one’s ICO did not follow this usual pattern. Instead, throughout the duration
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`of the EOS ICO, Defendants continuously withdrew funds from the funding wallet, beginning as
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`early as five days after the beginning of the ICO. In total, Defendants permitted the funds to be
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`withdrawn nearly a hundred times, accounting for close to 90% of the total funds raised throughout
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`the ICO period and averaging one withdrawal every 3-4 days.
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`55. While withdrawal of funds during an ICO is not expressly prohibited, there are
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`significant concerns about how the withdrawn funds might be used, e.g., to buy tokens on
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`cryptocurrency exchanges, resulting in artificially inflated demand for EOS, increasing market
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`price, and fueling speculation and interest in the sale. Thus, there was some concern over
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`Block.one’s withdrawal of funds. Responding to these concerns, Block.one announced in August
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`2017 that it was “finalizing an engagement with a third-party auditor to release a public audit
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`designed to provide comfort that block.one has not participated in the EOS token sale in anyway
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`[sic], with any funds.” Yet, no audit report has been made public, despite the ease of doing so with
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`the transaction records that the blockchain inherently provides.
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`15
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`Case 1:20-cv-03829 Document 1 Filed 05/18/20 Page 16 of 50
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`56.
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`At the conclusion of the ICO in June 2018, Block.one raised over $4 billion, which
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`it classified as “revenue of block.one.”
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`C. Defendants Aggressively Marketed EOS Securities in the United States
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`57.
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`From 2017 through the present, to drive demand for EOS Securities, Defendants
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`have aggressively courted investors throughout the United States. Block.one first announced itself
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`at a May 2017 conference in New York City, and punctuated its arrival with expensive ad space
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`on a Times Square billboard.
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`
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`58.
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`Block.one’s executives and representatives, including, but not limited to, Pierce,
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`Blumer, and Larimer, have spoken at myriad conferences and met potential investors at informal
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`meetups, including in New York. For example, on May 22, 2017, Larimer and Blumer discussed
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`EOSIO software and EOS token distribution as speakers at Consensus, a blockchain industry
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`conference in New York City, and hosted a post-conference reception.
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`59.
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` Block.one also promoted its proposed business and ICO to U.S.-based persons on
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`the EOS.IO website and through various social media and forum posts. The EOS.IO website,
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`White Paper, and other promotional statements were accessible to purchasers and potential
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`purchasers, and viewable by U.S. persons.
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`60.
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`Block.one released the White Paper on June 5, 2017, which included a section
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`called, “Governance,” which promised that “power [would] originate[] with the token holders who
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`delegate [their] power to block producers.” The block producers would be “given limited and
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`checked authority to freeze accounts, update defective applications, and propose hard forking
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`changes to the underlying protocol.” Users were also required to sign a “constitution,” which
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`included a detailed protocol for changing the constitution and any source code. These are key
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`features that underscore the purported “decentralized” nature of the EOS Blockchain.
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`16
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`Case 1:20-cv-03829 Document 1 Filed 05/18/20 Page 17 of 50
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`61.
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`On March 12, 2018, before Defendants had any functional software, former
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`Block.one partner Brock Pierce said about EOS:
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`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
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`Blumer said about Block.one: “We build practical blockchain solutions that are designed to
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`interact with humanity in a way that takes into account the way that we really operate.”
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`63.
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`Defendants worked cooperatively to promote EOSIO as the next, superior version
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`of the existing blockchains, like Bitcoin and Ethereum. To highlight the superiority of the EOS
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`Blockchain, Defendants told prospective investors that “EOS” stood for “Ethereum on steroids.”
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`64.
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`In an interview with Roanoke Times in early 2018, Daniel Larimer said – without a
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`hint of hyperbole in his voice – “[EOS] will be better than bitcoin and all the rest. EOS could
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`fundamentally change the way society operates.” Despite announcing its grandiose plans to create
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`world-changing tools, Block.one declined to reveal more details “to prevent copycats.”
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`65.
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`Block.one further promoted EOS Securities by publicizing a series of equity
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`investments in Block.one by prominent institutional and high-net-worth individual investors like
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`PayPal’s founder Peter Thiel, Jihan Wu of crypto mining hardware giant Bitmain, Alan Howard,
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`Louis Bacon, Christian Angermayer, Lansdowne Investment Company, and Galaxy Digital’s
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`Mike Novogratz. By publicizing the news, Block.one suggested that those investors’ interest in
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`owning Block.one’s equity reflected on the value of EOS Securities. Those investors, however,
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`did not purchase EOS Securities; instead, they purchased shares in the entity that recorded over $4
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`billion in revenue from the sa