Owen v. Elastos Foundation

Background

Mark Owen and James Wandling brought a proposed class action against Elastos Foundation, Feng Han, and Rong Chen. They alleged that the defendants offered, sold, or solicited the sale of ELA Tokens—cryptocurrency tokens connected to Elastos—without registering them as securities. The claims arise under Sections 5, 12(a)(1), and 15 of the Securities Act of 1933.

The complaint described three groups of transactions. First, Wandling bought ELA Tokens directly from Elastos during its January 2018 initial coin offering. Second, Owen bought ELA Tokens on the secondary market in September 2018, after the tokens began trading on the Huobi Exchange. Third, Wandling received additional ELA Tokens in November 2018 under a lock-in program, in exchange for agreeing not to sell his tokens for three years.

Arguments on the Motion

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(2), which concerns personal jurisdiction, and Rule 12(b)(6), which concerns whether a complaint states a legally sufficient claim. They principally argued that Owen lacked standing to assert claims based on the initial offering, that the court lacked personal jurisdiction over Han and Chen, that Wandling’s initial-offering claims were untimely, and that the Individual Defendants were not statutory “sellers” for purposes of Section 12(a)(1).

Personal Jurisdiction

The court held that the plaintiffs adequately pleaded personal jurisdiction over each defendant under Section 77v(a) of the Securities Act, which authorizes nationwide service of process. The court concluded that the relevant contacts could be considered on a nationwide basis rather than only in New York.

Elastos conceded that the complaint adequately alleged sufficient contacts with the United States. The court found that the allegations also supported general or specific jurisdiction over Han: the complaint alleged that he maintained a residence in Cambridge, Massachusetts when the action was filed and repeatedly promoted Elastos and the ELA Tokens in the United States. The court likewise found jurisdiction over Chen, who allegedly resided in the United States during the relevant period and promoted Elastos and the tokens in the United States. The court rejected the argument that exercising jurisdiction would be unfair or unreasonable. Because it found jurisdiction under the federal Securities Act, it did not decide whether jurisdiction existed under New York law.

Section 12(a)(1) Claims

Section 12(a)(1) creates a private claim for selling a security in violation of Section 5. To plead a basic Section 5 violation, a plaintiff must allege that no registration statement was in effect, that the defendant offered or sold a security, and that the transaction occurred in interstate commerce. The court concluded that the plaintiffs adequately pleaded each of those points for the ICO sales, the secondary-market sales, and the lock-in-program distributions.

Initial Offering and Timeliness

The defendants did not dispute, for purposes of the motion, that the ELA Tokens were securities, that no registration statement was in effect, that Wandling purchased the tokens from Elastos, or that the transactions occurred in interstate commerce. Instead, they argued that Owen could not sue over the ICO because he did not buy tokens in that offering and that Wandling joined the case after the one-year limitations period.

The court rejected those arguments at the pleading stage. Owen filed a notice of summons on January 31, 2019, within one year of the last delivery of ICO tokens. Although Owen could not personally assert claims based on purchases he did not make, the court held that he adequately pleaded “class standing”—the ability to represent claims involving similar conduct that injured other proposed class members. The court also concluded that the filing of the class action would have paused the limitations period for the proposed class members under the Supreme Court’s class-action tolling rule, even if Owen lacked class standing for the ICO claims. The court therefore held that the ICO claims were adequately pleaded as timely.

Secondary-Market Sales

The defendants argued that Section 12(a)(1) did not apply to secondary-market transactions and that they were not sellers of tokens traded on that market. The court rejected both arguments. It held that Section 12(a)(1) can cover secondary-market sales because it provides a remedy for violations of Section 5, which prohibits selling an unregistered security through a prospectus or otherwise. The court stated that the defendants could instead rely on an applicable statutory exemption, but they had not claimed one at this stage.

The court also held that the complaint adequately alleged that the Individual Defendants solicited secondary-market purchases for their own financial interests. The complaint described a sustained marketing campaign, public events, interviews, and social-media messages promoting the tokens and their value. Under the Supreme Court’s interpretation of Section 12(a)(1), a person who actively solicits a purchase and is motivated at least partly by personal financial interests or the interests of the securities owner may qualify as a statutory seller, even without transferring title. The court found the allegations sufficient, including the allegation that Owen relied on the defendants’ solicitations when he purchased tokens.

Lock-In Program

The court separately held that the complaint adequately alleged a Section 12(a)(1) claim based on the lock-in program. As pleaded, investors exchanged a commitment not to sell their tokens for a specified period for additional ELA Tokens from Elastos. The court treated that exchange as a sale and delivery of securities. Because the additional tokens were delivered to Wandling on November 5, 2018, and he joined the action less than one year later, the court found those claims timely as pleaded.

Section 15 Claims

Section 15 provides potential liability for persons who control someone responsible for a securities-law violation. The defendants did not contest at that stage that the Individual Defendants were adequately alleged to be control persons. Because the court found that the complaint adequately pleaded primary violations of Sections 5 and 12(a)(1), it also held that the Section 15 claims were adequately pleaded.

Disposition

The court denied the defendants’ motion to dismiss the Amended Complaint. The Clerk of Court was directed to terminate the pending motion. The opinion addressed whether the allegations were sufficient to proceed past the dismissal stage; it did not make a final determination of liability or certify a class.