New York—If there’s anything this year will bring is the start to official regulatory guidance surrounding digital monies and cryptocurrency.
Last week was particularly exciting for cryptocurrency enthusiasts, as the U.S. Securities and Exchange Commission (SEC) released its very first “no-action” letter with respect to a Florida-based airline startup. The letter means that TurnKeyJet, would be able to continue selling its TKJ tokens to customers for the sole purpose of helping them book travel on private jets, without the SEC taking regulatory action against the startup.
Unfortunately, for cryptocurrency startup, ATBCoin, LLC, the future isn’t so bright.
On Sunday, a New York federal judge ruled that the startup along with two of its executives must face a proposed shareholder class action, accusing them of selling unregistered securities in its initial coin offering, or ICO.
Back in December 2017, investor and lead plaintiff, Raymond Balestra sued ATBCoin and its executives following the ICO which took place between June 12 and September 15, allegedly raising more than $20 million, according to its filing.
Breaking Down the “Complaint”
In the Complaint, Balestra brought two counts of violations of the U.S. Securities Act, specifically Section 12(A) and Section 15(a).
Balestra claimed that ATBCoin never filed a registration statement with the SEC and that, as controlling members of the company, co-founders, Edward Ng and Herbert W. Hoover, are liable for any misdeeds related to the ICO.
Allegation #1: ATB Coins Are Securities
Allegation #2: ATB Coins Constitute “Investment Contracts“
The company had previously told investors that the new Blockchain would be the fastest in the world, but when it debuted at the close of the ICO, it became clear that it wasn’t as revolutionary as advertised and was incapable of the technological advancements the company had promised, according to the filing.
“Users didn’t flock to ATB Blockchain as expected, and by March 2018, the value of ATB Coins had plunged by more than 85 percent,” Balestra indicated.
“Plaintiff has provided ample evidence that both Ng and Hoover targeted the U.S. market in an effort to promote the sale of ATB Coins, the very unregistered security at issue in this litigation,” U.S. District Court Judge Vernon S. Broderick held.
The company’s argument that Balestra’s allegation lacked personal jurisdiction and failed to state a claim due to ATB Coins not being securities, was not well-taken by Judge Broderick, who rejected the argument in full.
The Judge found that at this stage in litigation, Balestra had sufficiently shown that the blockchain startup’s business was conducted in New York and that it advertised to potential investors across the country, fulfilling the personal jurisdiction requirement.
As for meeting the requirements of a “security” under the SEC’s Howey Test, Judge Broderick found that ATB Coins are considered digital assets which qualify as securities, upholding Balestra’s allegations in the Complaint.
On Sunday, the U.S. District Judge also appointed Levi & Korsinsky LLP as lead counsel.
Case: Balestra v. ATBCoin LLC, Case No. 1:17-cv-10001
Court: U.S. District Court for the Southern District of New York
Judge: Judge Vernon S. Broderick
Counsel (Class): Donald J. Enright and Christopher James Kupka, Levi & Korsinsky LLP
Counsel (Defendant): Brian D. Caplan, Brett Van Benthysen, and Edward Peter Grosz of Reitler Kailas & Rosenblatt, LLC.