It’s been a record year for Federal lawsuits related to initial coin offerings, the new fundraising method that lets entrepreneurs raise capital by selling tokens on a blockchain.
While 2017 saw the first five US class action lawsuits related to the technology, according to a report released today by the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research, the first six months of 2018 alone had an additional seven filings.
But the rise in class action lawsuits around ICOs coincides with a larger, “historic” incidence of class action securities lawsuits since 2016, with more than 750 federal securities class actions having been filed since halfway through that year. That's the most prolific 24-month period since the Private Securities Litigation Reform Act of 1995 was enacted, according the the report.
Former commissioner of the U.S. Securities and Exchange Commission, report co-author, and Stanford Law School Professor Joseph Grundfest described the findings in a statement:
“Class action securities fraud litigation continues to affect a large percentage of publicly traded firms."
While ICOs aren't typically tied to public firms, they have nevertheless raised $19.4 billion since 2014, according to CoinDesk data, with the total amount raised in 2018 surpassing all of 2017 earlier this year. Six of the seven class actions filed this year are still active, according to data from the Stanford Law School Clearinghouse.
Notable ongoing lawsuits include one against San Francisco-based Ripple Labs filed in June alleging the defendants raised “hundreds of millions of dollars” through the unregistered sale of XRP to retail investors. Another suit, against UK-based Bitconnect, alleges that the company "failed to disclose material facts” that caused its value to drop.
Further ongoing cases filed this year are against Paragon Coin, Latium Network, DRIP and Cloud With Me. A seventh case filed this year against cryptocurrency mining operation, Mining Max, was dismissed in June.
In total, 12 ICO class actions are documented in the report, all of which occurred in the past two years. Two of these ICOs also have parallel action in California state courts.
The new fundraising mechanism has been the target of frequent accusations of abuse due to their perceived lack of accountability and an early disregard for securities law. As a result, the US Securities and Exchange Commission (SEC), earlier this year named the head of its distributed ledger technology working group, Valerie Szczepanik, as the first senior adviser for digital assets, tasked in part to look into the issue.
However, the Cornerstone report is interesting in that it also highlights existing problems related to more traditional securities issuances. While the total number of ICOs is on pace to more than double in 2018, they represent just a tiny fraction of the total class action lawsuits being filed.
“If the trends observed in the first half of the year continue to year-end, approximately 8.5 percent of all companies listed on the NYSE and NASDAQ markets will have been sued in these cases."