Investors Sue Private Cryptocurrency Over $17M Initial Offering
New Jersey Law Journal, June 7, 2018
Developers of a private cryptocurrency called Latium have been named as defendants in a suit in federal court in Newark, New Jersey on behalf of investors who spent $17 million on its initial offering.
The Latium offering violated federal securities laws by selling unregistered securities, the suit claims. Although the developers depicted the Latium initial coin offering as a sale of “utility-based tokens,” it was subject to the Securities Act of 1933 because investors were promised that the tokens would be worth more than the price they paid, according to the suit.
Purchasers of the initial offering of Latium tokens paid with U.S. dollars or with another cryptocurrency, Ether. Named plaintiff Joevannie Solis paid $25,000 to purchase 208,333 Latium tokens during the initial offering in January.
Latium tokens were worth roughly 5 cents each on Thursday afternoon, according to worldcoinindex.com. At that rate, Solis’ $25,000 investment is now worth about $10,000.
The suit claims Latium is subject to strict liability for the offer and sale of unregistered securities.
Besides The Latium Network, the suit names David Johnson, the founder and project architect of Latium, and Matthew Carden, its co-founder and chief commercial officer, as defendants.
Judicial intervention is urgently needed to preserve Solis’ and investors’ significant financial interests and to rectify existing and future irreparable harm to them, the suit said. Solis, on his own behalf and that of the class, seeks compensatory and injunctive relief and rescission and repayment of all investments in Latium ICO. The suit also seeks to have such funds secured and conserved until repayment is made.
Latium’s founders decided to invent their own new currency, for use only within its own platform, “to capitalize on the much-publicized exponential gains in widely accepted cryptocurrencies (like Bitcoin and Ether),” the suit states. The initial token offering was conducted between July 2017 and this March, with a private presale, followed by a limited “white list” sale and five stages of sales to the general public, with token prices increasing at each step. A limited number of Latium tokens was offered at each stage of the sale.
A Latium press release said the company represents “a paradigm shift in decentralized economics that streamlines how humans work and earn money, exclusively using the [Latium] cryptocurrency.” The Latium website carries the motto, “Crypto Meets Gig Economy,” and the site lists an assortment of tasks that an individual can perform for compensation in Latium tokens. Among the tasks listed are to apply for a Chase credit card, for 101 Latium tokens; or receive 30 Latium tokens to sign up for a smartphone app called Ibotta, or giving a “like” to Latium’s Facebook page for five tokens.
Latium appears to anticipate a challenge over whether it is subject to securities laws in a white paper on its website. It advises investors that “participation in a token sale can be highly speculative and could involve a risk of loss,” and that “this website or white paper does not constitute the offering of a security.”
The white paper cited a test from SEC v. W.J. Howey, a 1946 Supreme Court ruling, as the primary method for determining if a particular instrument is a security under U.S. law.
“Latium Network Inc. and its counsel have conducted an analysis under the Howey test, and continues to do so, with the conclusion that, in all likelihood, Latium does not pose a significant risk of implicating federal securities laws. In light of this, and absent any contrary conclusions or findings, Latium tokens have not and will not be registered or filed under the securities laws or regulations of the United States,” the white paper said.
Still, the company statement said, cryptographic currency “is a young industry” and its regulatory status is “subject to significant uncertainty.”
Company founder Johnson, reached by phone, said he had not seen the suit and declined to comment. He said that, to his knowledge, the U.S. Securities and Exchange Commission has not issued any rulings on whether cryptocurrency falls under its regulations.
The suit was filed by Eric Kanefsky of Calcagni & Kanefsky in Newark and Aaron Dickey of Flint Law Firm in Edwardsville, Illinois.
Kanefsky said that although the U.S. Securities and Exchange Commission hasn’t ruled on whether cryptocurrency is a security, New Jersey regulators have taken the position that people who buy them are entitled to rescind their purchase. “The notion that people can be in at the inception of what’s being pitched as the next social media is what’s driving incredible amounts of money into these companies,” Kanefsky said.