Class action lawsuit filed against Block.one, the company behind EOS

The company that conducted the initial coin offering (ICO) for the EOS token, Block.one, has had a class-action lawsuit filed against them in the Southern District of New York. The suit alleges that the company defrauded the plaintiffs through a year-long illegal ICO that raised more than US$4 billion but left investors with an unregulated asset.
The class-action suit comes just months after the company settled with the Securities and Exchange Commission (SEC) and paid a US$24 million penalty for conducting an unregistered ICO.
The SEC found Block.one in violation of federal securities laws for the online crowdfunding event hosted from June 2017 until June 2018. The SEC issued a cease-and-desist order in September 2019 against the further sale of Block.one’s tokens, determining they were securities under the law and had been sold without proper registration.
Founded in 2017, the company sold EOS tokens on the Ethereum network to fund development. The company’s primary product is EOS.IO, an open-source blockchain platform. Block.one has operations in Virginia and Hong Kong but is registered in the Cayman Islands.
The company sold 900 million EOS tokens by aggressively marketing to investors in the United States and other countries. Once the EOS network became operational, the company swapped the Ethereum-based EOS tokens for digital tokens on the EOS network.
The offering was accompanied by a Times Square billboard ad, an ambitious white paper, presentations by company principals at blockchain conferences and meet-ups, and promotion via crypto-focused online news and investor outlets.
As the complaint states, "defendants worked cooperatively to promote EOSIO as the next, superior version of the existing blockchains." The company agreed to an SEC settlement without admitting or denying the agency’s findings.
The latest suit was filed by Crypto Assets Opportunity Fund LLC and Johnny Hong. The lawsuit lists Block.one, its CEO Brendan Blumer, CTO Daniel Larimer, former Block.one partner Ian Grigg, and former adviser Brock Pierce as defendants.
The plaintiffs allege a breach of fiduciary duty and unjust enrichment by defendants, who provided investors with false and misleading information about EOS. According to the complaint, Crypto Assets Opportunity Fund LLC and Hong claim to have purchased tokens on a secondary market after the sale, which, as reported at the time, brought in an estimated US$4 billion.
The complaint alleges that the consequence of the wilful evasion of regulations was to blind the ICO investors, depriving them of disclosures regarding Block.one’s financial history, operations and budget, executive compensation, material trends, risk factors, and other information required by law. The company also failed to disclose that it was the subject of a government investigation during the 2019 SEC investigation.
"To drive the demand for and increase profit from the sales of EOS Securities, Defendants further violated the securities laws by making materially false and misleading statements about EOS, which artificially inflated the prices for the EOS Securities and damaged unsuspecting investors," the complaint reads.
The plaintiffs lean on Block.one’s past legal issues with the SEC, using the title "EOS Securities" for the company’s token throughout. The complaint alleges that defendants told prospective investors that EOS stood for "Ethereum on steroids."
However, by not outperforming other blockchains, not disclosing significant internal disagreements, and failing to decentralize sufficiently, the complaint alleges that Block.one misled investors.
James Koutoulas, CEO of hedge fund Typhon Capital Management and securities lawyer stated, "Institutional funds that were lied to by Block.one have a duty to all their investors – large and small – to take action against fraudsters and con artists." He continued, "We believe in the cryptocurrency space, which is why those who exploit it for naked personal gain need to be held accountable. Where the SEC only dipped a toe into upholding securities laws and protecting investors, our action encourages those who were swindled by this biggest of all crypto frauds to join us in pressing the courts for justice and restitution."
Daniel Berger, a director at Grant & Eisenhofer and veteran class action litigator, said, "Investors of all types deserve to be treated equitably and honestly. This lawsuit is an important means to redress the brazenly unlawful conduct that Block.one exhibited in defrauding investors through its EOS token offering."
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