On April 3, 2020, multiple class-action law suits were filed in the Southern District of New York against a host of crypto exchanges and token issuers, including Binance, Bibox, KuCoin, HDR Global Trading Ltd (which operates BitMEX), Tron Foundation, Block.one, BProtocol Foundation (also known as Bancor), Civic Technologies Inc., the Kyber Network, Quantstamp Inc., and Status Research & Development GmbH. 

Investors Chase Williams, Alexander Clifford, William Zhang, and Eric Lee, on behalf of the proposed investor classes, allege that the defendants engaged in unregistered trading of securities and misleading of investors.  For example, the claim against Binance states that Binance conducted millions of transactions without registering with the SEC as an exchange or broker-dealer, and, as a result, investors were not informed of the significant risks inherent in these investments, as federal and state securities laws require.  The claim against Tron states that issuers, including Tron, typically released a “whitepaper” describing the project and terms of the ICO.  The investors claimed these whitepapers contained vastly less information than a registration statement filed with the SEC would have included, and should have included had Tron’s TRX token been properly registered with the SEC.

The behavior at issue seems to predate the SEC’s guidance from April 2019, in which the Commission discusses the standard by which digital tokens will be considered securities. This may seem to benefit the defendants, who may therefore argue that they should not be held to the standards that did not yet exist.  But, as we have reported on previously, the SEC had been extremely active in pursuing securities fraud cases, and, as early as its DAO Investigation Report in July 2017, had made it clear that tokens will be considered securities if their issuance meets the longstanding definition of investment contracts under the SEC v. W.J. Howey Co. test and its progeny.  It is undoubtedly for that reason that the complaints in these lawsuits specifically allege how each of the Howey factors is satisfied.