Court dismisses class action against cryptocurrency exchange: A review of the holding in Holsworth v. BProtocol Foundation

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The US District Court in the Southern District of New York has dismissed a class action lawsuit against BProtocol Foundation (Bancor) for an alleged unregistered offering of token securities. The suit was one of a number of similar class actions filed in April 2020 against cryptocurrency exchanges and issuers by law firms Roche Cyrulnik Freedman LLP and Selendy & Gay, PLLC. See our April 2020 issue for information on these filings.

The case concerns Bancor’s June 2017 sale of tokens called BNT. Plaintiff Timothy Holsworth alleged that he bought 587 BNT tokens on September 4, 2019, from Wisconsin, on a digital exchange in Singapore, for an aggregate cost of $212.50. Holsworth further alleged that Bancor, a Swiss foundation with offices in Switzerland and Israel, solicited individuals to purchase BNT on secondary markets and that BNT constitutes a security.

Based on these allegations, Holsworth filed a 193-page second amended complaint (SAC) against Bancor and other defendants in the United States District Court for the Southern District to New York. The SAC contained over 100 claims for relief, including under the Securities Act for unregistered sale of securities, on sought certification of a putative class of BNT purchasers.

On the defendants’ motion, the court issued a terse three-page opinion dismissing the SAC on multiple grounds. First, the court held that Holsworth lacked standing, failing to have alleged that he sold any BNT tokens at a loss and thus suffered an injury in fact. Next, the court held that it lacked personal jurisdiction over the defendants, reasoning that their promotional activities in the US alone were not sufficient to support personal jurisdiction over them and that Holsworth had not alleged that these activities caused him to purchase BNT. The court also noted other infirmities with the pleadings, including a lack of connection between the defendants’ sale and Holsworth’s purchase, the lack of privity between the defendants and Holsworth or other solicitation of Holsworth (required for a Section 12 claim for sale of unregistered securities), and the passage of the one-year statute of limitations.

While some courts have been sympathetic to claims for unregistered sale of token securities, the brevity and tone of this opinion suggests an intolerance for the plaintiff’s prolix pleading of claims with little connection to the US and no clear explanation of financial loss.

Of note, as of late February 2021, BNT was trading at roughly $5.50  ̶  over ten times the price at which Holsworth purchased it.