Northern District of California Denies Cryptocurrency Foundation’s Motion to Dismiss, Holding Foundation Is Subject to SEC Jurisdiction

Skadden, Arps, Slate, Meagher & Flom LLP

In re Tezos Sec. Litig., No. 17-cv-06779 (N.D. Cal. Aug. 7, 2018)

Judge Richard Seeborg denied defendant Tezos’ motion to dismiss, holding that the company’s cryptocurrency — also called Tezos — is a security subject to the jurisdiction of the SEC.

The plaintiff investors argued that cryptocurrency distributed in connection with the defendant’s initial coin offering (ICO) was subject to SEC rules and regulations for the sale of unregistered securities because the critical aspects of the sale occurred in the United States. The defendant argued that the ICO occurred outside the United States because it was administered by the Swiss-based Tezos Foundation, the transactions took place in the U.K. where the software was based and the terms of the sale governing the ICO contained a forum selection clause that designated Switzerland as the exclusive forum for disputes.

The court held that the Tezos ICO fell within the SEC’s jurisdiction. The court reasoned that, in determining whether the sale of “an unregistered security, purchased on the internet, and ‘recorded on the blockchain’” is a domestic transaction subject to the application of U.S. law and thus the SEC’s jurisdiction, the “critical aspects of the sale” must occur in the United States. Here, the court found that because the transaction was hosted on an Arizona-based server, run by a California resident, and ICO investors had likely learned about it from “marketing that almost exclusively targeted [U.S.] residents,” the critical aspects of the sale occurred in the United States, and thus the sale was subject to the jurisdiction of the SEC.

This summary can be found in the December 2018 issue of Inside the Courts.