The creators of Elastos (ELA) and the cryptocurrency exchange Huobi may be in legal hot water, after Elastos ICO investors accused them of hosting an unauthorized securities sale.
The investors have asked the New York Supreme Court to summon the the Elastos Foundation and team members, as well as Huobi and its US partner, HBUS, to answer their complaints, according to a leaked summons filing. A class-action lawsuit led by plaintiff Mark Owen claims that the Elastos ICO – which took place in 2018 – violated Section 5 of the Securities Act 1933, mandating all sales to register first with the SEC.
The summons claims that the token distribution was an unregistered US securities sale. The filing alleges that ELA tokens were sold on the premise that they were an investment, which would increase in value as Elastos developed its ecosystem and user demand increased.
The document says that neither Elastos or Huobi registered the ICO with the SEC. The whitepaper describes ELA tokens as utility tokens, used for trading and exchanging value on the Elastos blockchain as well as to pay for network fees. Holders were encouraged to participate in a three-year lockup period and earn 6% returns on their assets; the project announced that it was ending the scheme in October.
“The defendants brazenly disregarded these well-established U.S. securities laws by, inter alia, failing to register ELA securities with the SEC,” the summons reads. “No defendant in this action was registered with the SEC as a broker or dealer as required by law to legally sell securities in the United States.”
Elastos, originally launched in China, wants to build a “blockchain-powered world wide web.” The ICO, which ran in January 2018, sold 33M ELA tokens, raising a total of $94M for the project. Although investors from China were not allowed to participate, there were no such restrictions against US citizens.
Received on January 31st, the filing has yet to be signed off by the county clerk’s office. It is therefore not a formal summons at the time of writing.
Other defendants listed in the summons include Elastos co-founder, Feng Han; the Foundation’s chairman, Rong Chen; chief marketing officer Fay Li and North American strategist, Zach Warsavage. Steven Nam, the managing editor of Stanford Journal of Blockchain Law & Policy, and a former advisor to Elastos, has also been named.
Founder Rong Chen confirmed to Crypto Briefing that the Elastos Foundation had indeed received the summons and would be contesting the allegations. He said:
On January 31, 2019, a summons for a purported class action lawsuit was filed in the Supreme Court of the State of New York, County of New York, against the Elastos Foundation and certain officers and employees (the “Elastos Defendants”).
“The lawsuit purports to bring suit on behalf of individuals who allegedly purchased Elastos tokens in the United States, alleging, among other things, that the issuance of ELA tokens was a public offering of unregistered securities in violation of Sections 12(a)(1) of the Securities Act of 1933. Elastos believes that the claims made by the plaintiff are without merit and will vigorously defend against them.
Crypto Briefing reached out to Huobi and the plaintiff’s advocate for comment, but had not received a response by press time.
The author is invested in digital assets, but none mentioned in this article.