Recently, cryptocurrency buyers withdrew five separate proposed class actions against various cryptocurrency companies. The cases, which were filed against Quantstamp Inc.; Status Research and Development GmbH; Civic Technologies Inc.; KayDex Pte. Ltd.; and HDR Global Trading Ltd., alleged that the companies harmed their customers by issuing or offering for sale digital assets that had not been properly registered as securities. These five cases were among a group of 11 filed in 2020 against various cryptocurrency companies for unlawfully issuing and selling digital tokens; at least two of these cases remain active.
The dismissals come only a few weeks after a similar class action was dismissed on statute of limitations grounds under the Securities Act of 1933 because the plaintiff did not bring his action a) for Section 12(a)(1) within one year of the violation on which it is based; or (b) for Section 12(a)(2) within one year after the discovery of untrue statements or omissions.
In that case, In re Bibox Group Holdings Ltd. Sec. Litig., No. 20-cv-2807 (DLC), in the U.S. District Court for the Southern District of New York, U.S. District Judge Denise Cote dismissed a suit by a cryptocurrency purchaser who claimed that Bibox, a digital-asset trading platform, had sold digital tokens without first registering them as securities. Among other things, the plaintiff maintained that he did not know there was a violation until the SEC issued its Framework for "Investment Contract" Analysis of Digital Assets, and that Bibox concealed the fact that that it was selling a Howey security and so plaintiff’s discovery of the untrue statements was delayed.
The court held that none of that avoids the application the statute of limitations because: (1) there is no “discovery” rule in Section 12(a)(1) and, even if there were, plaintiff had all the facts related to a violation well before the Framework was published; and (2) there was no fraudulent concealment for Section 12(a)(2) because the SEC’s Framework simply published the SEC’s “nonbinding interpretation of Howey.” The court explained that “while that interpretation may assist the plaintiff in crafting a legal argument that BIX is indeed a security and subject to regulation under federal securities law, that guidance did not extend the statute of limitations period for his claims.”
The court went on to say that “the plaintiff’s assertion that [the token] is a security under the Howey test is a legal conclusion, not a fact, and the plaintiff otherwise fails to describe any material facts that Bibox concealed or how he failed to discover those facts despite the exercise of diligence. Therefore, equitable tolling is unavailable here.”
In other words, the plaintiff may have discovered that he had a legal claim when the Framework was published, he did not discover any new essential facts related to the alleged violation at that time.
Judge Cote’s Bibox opinion is quite significant for crypto litigation based on Sections 12(a)(1) and (2). As shown by the recent voluntary dismissals of the other actions, this statute of limitations analysis may preclude many Section 12 lawsuits.
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Blockchain technology utilizes a distributed digital ledger to record and track information, and can be leveraged to gain transparency and certainty in transactions ranging from cryptocurrency to supply chain tracking. This blog provides information on the legal developments surrounding implementation of blockchain technology, with an initial focus on the financial services sector.