Investors in a private cryptocurrency firm brought a class action securities lawsuit against the firm itself, Latium Network, Inc. (Latium) and individually against Latium’s founder and CEO David Johnson and co-founder and chief commercial officer Matthew Carden. The lawsuit alleges that the defendants are subject to strict liability for violating Section 5 of the Securities Act of 1933 by offering and selling unregistered securities in the form of LatiumX tokens. According to the complaint, filed in federal court in Newark last week, the defendants attempted to represent the $17 million Latium initial coin offering (ICO) as a sale of “utility-based tokens,” while in fact the ICO was an offer and sale of securities subject to registration requirements of the federal securities laws because the defendants claimed that the value of the LatiumX tokens would increase after the launch of the new cryptocurrency platform.[1]

Lead plaintiff Joevannie Solis invested $25,000 to buy 208,333 LatiumX tokens during the ICO, relying on the defendants’ representations regarding the cryptocurrency’s platform. According to worldcoinindex.com, the tokens were worth about 5 cents each last week, making Solis’ $25,000 investment now worth around $10,000. Solis, on behalf of himself and similarly situated investors in the class, seeks a judicial declaration that the LatiumX tokens are indeed securities subject to the federal registration requirements, as well as injunctive relief preventing the defendants from transferring or using any investment funds and providing rescission and repayment of all investments in the Latium ICO.

This lawsuit is another in a string of litigations concerning whether virtual currencies constitute securities subject to the federal securities laws and registration requirements. Chairman of the SEC Jay Clayton has said that certain types of cryptocurrencies could qualify as securities, while others do not.[2] The Commodity Futures Trading Commission (CFTC) has classified bitcoin as a “commodity,” while ether and ripple, two other cryptocurrencies, likely are securities subject to the federal registration requirements.[3] As Clayton’s SEC statement warns, whether cryptocurrencies are ultimately determined to be securities “will depend on the characteristics and use of that particular asset.” Potential investors in cryptocurrencies should proceed with caution in this legally uncertain territory, as their rights and remedies will vary greatly depending on the ultimate classification of the virtual currency.

[1] Paragraphs 2, 3, 18, and 19 of the complaint, available at https://images.law.com/contrib/content/uploads/documents/1/latium.pdf.

[2] December 11, 2017. “Statement on Cryptocurrencies and Initial Coin Offerings” by SEC Chairman Jay Clayton, available at https://www.law.com/njlawjournal/2018/06/07/investors-sue-private-cryptocurrency-over-17m-initial-offering/?kw=Investors%20Sue%20Private%20Cryptocurrency%20Over%20%2417M%20Initial%20Offering&et=editorial&bu=New%20Jersey%20Law%20Journal&cn=20180608&src=EMC-Email&pt=Daily%20News%20Alert&slreturn=20180511105420.

[3] Gary Gensler, former CFTC Chairman, April 23, 2018, remarks at the MIT Business of Blockchain conference.