Big ICO based projects with legal issues.

Linda Willemse
Jun 3, 2018 · 6 min read

People in the cryptocurrency industry that have been around for more than a year probably remember the Tezos Initial Coin Offering (ICO), where they raised a record breaking amount of 230,000,000 USD. At that time no other project in the cryptocurrency industry ever managed to raise that much money. You’d think they would be able to focus on the project and deliver on time, but instead the project has been delayed because of the four class action lawsuits filed against the company.

Tezos is not the only project that’s been delayed because of legalities. GEMS, Shipchain and Giga-Watt are all facing legal claims. These projects have in common that they are based in the US. The United States are very strict when it comes to financial products and they usually require extensive research and filing with the Securities and Exchange Commission (SEC).

✅ Gems was a highly anticipated ICO project that issued GEM tokens. There was some controversy regarding the ICO. They only announced their token metrics after they created a large hype. They insinuated community members that participated in auditing Proof of Care submissions for the ICO could get a larger allocation, which didn’t happen. They opted for a Dutch auction for their ICO which put off a lot of people planning to invest in the project. From then on, some people saw Gems as a money grab project and a lot of potential investors abandoned the project.

They quietly continued to raise money from large investors and VC-firms. They allegedly collected 60,000,000 USD

On the 17th of March 2018 Founder and CEO of Gems Rory O’Reilly released an official statement that the company BitVault is suing Gems for trademark infringements including a preliminary injunction to prevent the company from using the name ‘‘ Gems ‘’. During the course of the litigation the Gems team decided to put the further issuance of GEM tokens on hold. An undisclosed amount of GEMS tokens is in circulation on exchanges at the moment with the sell side being a lot bigger than the buy side.

The hearing regarding the preliminary junction will continue on the 19th of June with no further delay, according to the California Central District Court records. At least until then the team cannot comment on the future of the Gems project.

https://www.pacermonitor.com/public/case/23664138/BITVAULT,_Inc_v_Rory_OReilly_et_al

✅ Shipchain, the latest big ICO project that is now dealing with legal issues is Shipchain. In January 2018 Shipchain raised 30,000,000 USD in their Initial Coin Offering. Apparently the Governor of South-Carolina decided the ICO wasn’t in compliance with local regulation. As the company is based in South-Carolina, they received a cease-and-desist letter from the local Attorney-General’s office. The letter contained claims that Shipchain didn’t take appropriately measures to register their ICO in order to be compliant to regulations. According to the authorities SHIP Token is considered a security and all security tokens need to be registered accordingly.

Shipchain Founder and CEO responded with an open letter to the community stating they did everything following the rules and that if the Attorney General had just contacted them they could have explained everything.

At this point Shipchain actively stopped ordering, issuing and selling SHIP tokens until this dispute is resolved.

https://mailchi.mp/3c70c06afb8e/shipchain-public-statement

✅ GigaWatt ICO started in July of 2017. They issued WATT tokens. The token is used to claim mining power in the mining colocation facility that GigaWatt the company offers. One WATT token represents the equivalent of 1 Watt of electricity that is used to have your miners running at the facility. WATT tokens were offered as utility tokens, but just offering it as a utility token doesn’t automatically make it a utility token. This is exactly what the lawsuit is about.

According to the legal papers: “ The complaint alleges that Giga Watt, Inc. and GigaWatt Pte. Ltd. violated Sections 12 and 15 of the Securities Act of 1933 and other securities laws by engaging in interstate commerce for the purposes of offering, selling, or delivering unregistered securities.’’

What is the difference between Utility Tokens and Security Tokens.
Utility Token: Is a Blockchain based service token that gives you access to the service the project offers.
Security Token: Is a Blockchain based valued product that is obligated to comply by the rules of the Security laws.

This lawsuit is still unresolved, see the latest information about it below.

https://www.pacermonitor.com/public/case/23992331/Moss_v_Giga_Watt_Inc_et_al

GigaWatt already settled a previous lawsuit in January of 2018.

✅ Tezos is/was facing a total of four lawsuits. It does seem like they got their legal issues resolved recently and are continuing moving forward. Unfortunately a lot of the initial funds raised has been spent on legal fees, but hopefully there is enough capital left for the team to create the project they originally intended to create, which is a fully decentralized self-governed Blockchain platform.

At the start of April 2018 messages of the Tezos Foundation started to emerge that they would be going forward with the project. They announced partners to help with the preparation of the Tezos project launch, they urged ICO participants to verify their ‘Donation’ and they partnered up with a software company that will help with additions to the codebase and overall project.

✅ The cryptocurrency industry has already had its fair share of outright scam ICO’s. In the last year some of the scams you might have heard of were Bitconnect, Benebit, Centra Tech, Monkey Capital ICO and Confido.

In real life if something seems too good to be true it usually is, but in crypto everything is possible, money is made just by opening your wallet, giving someone your public address can result in receiving thousands of dollars’ worth of tokens that you can convert to cold hard cash. Giving someone your private address can result in your wallet being wiped clean.

Vultures pray on people not yet familiar with the technology to con them. As with all industries where there is money to be made, there are people trying to scam others. In this new emerging market there are a lot of opportunistic greedy people thinking of new ways to scam others out of their tokens/ coins.

Is the project over and done with after being hit by a legal suit?
This isn’t necessarily the case. In the past, several cryptocurrency industry projects have managed to settle law-suits and continue with their day-to-day business operations. Especially when a business is based in the US lawsuits are pretty common.

Projects that already overcame legal issues are Ripple Labs for one and Binance is another one.

My believes are that ICO projects will continue to be put under a magnifying glass by authorities especially until there is proper regulation and there’s an official stance in the definitions of utility tokens and security tokens by law.

🚩 Always do your own extensive research when investing in ICO projects. These projects all have a high risk. Check if the project is compliant with regional government laws. When a US based project is open to US investors or there is no KYC required that raised red flags for me.

✅ Hopefully the teams of Gems, Shipchain, GigaWatt and Tezos can overcome these legal issues and prove to the industry they are here to stay with the deliverance of great products.

In this emerging industry there are still a lot of things that need to be resolved, like: insider trading, shilling small cap assets by big influencers and introducing scam projects to the industry. If we can get these things resolved we’ve come a long way and this relatively new industry can become even bigger than the internet hype of the late 1990’s — early 2000’s.

✅ Full disclosure, I’ve invested in GigaWatt ICO. I don’t own SHIP, WATT, GEMS or XTZ tokens.

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Linda Willemse

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Blockchain and cryptocurrency content creator. Writing for | Hacker Noon | The Startup | Good Audience | Blockdelta 📧: lindacrypto@ziggo.nl