Owen v. Elastos Found.

• Decision Date: 09 December 2021
• Docket Number: 1:19-cv-5462-GHW
• Parties: MARK OWEN and JAMES WANDLING, Individually and On Behalf of All Others Similarly Situated, Plaintiffs, v. ELASTOS FOUNDATION, FENG HAN, and RONG CHEN, Defendants.
• Court: U.S. District Court — Southern District of New York

MARK OWEN and JAMES WANDLING, Individually and On Behalf of All Others Similarly Situated, Plaintiffs,
v.
ELASTOS FOUNDATION, FENG HAN, and RONG CHEN, Defendants.

No. 1:19-cv-5462-GHW

United States District Court, S.D. New York

December 9, 2021

MEMORANDUM OPINION & ORDER

GREGORY H. WOODS, UNITED STATES DISTRICT JUDGE:

Plaintiffs Mark Owen and James Wandling (“Plaintiffs”) bring this putative class action alleging that Defendants Elastos Foundation (“Elastos”), Feng Han, and Rong Chen (together with Han, the “Individual Defendants, ” and, together with Elastos, the “Defendants”) violated Sections 5, 12(a)(1), and 15 of the Securities Act of 1933 (the “Securities Act”) by selling-and soliciting the sale of-unregistered securities in the form of cryptocurrency tokens. Defendants moved to dismiss the Amended Complaint under Federal Rules of Civil Procedure 12(b)(2) and 12(b)(6), principally arguing that Owen lacks standing under Section 12(a)(1), that the Court lacks personal jurisdiction over the Individual Defendants, that Wandling's claims are time-barred, and that the Individual Defendants are not “sellers” of securities under Section 12(a)(1). Because the Court finds that Plaintiffs have adequately pleaded timely violations of Section 12(a)(1) for sales of unregistered securities as part of both the Elastos ICO and during sales on the secondary market, Defendants' motion is DENIED.

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I.BACKGROUND

A. The Defendants

Defendant Rong Chen is a co-founder and Executive Chairman of Elastos. Amended Compl. (“AC”), Dkt. No. 68, ¶ 16. At the time of the events forming the basis for this action, Chen resided and worked near Redmond, Washington. Id.

Defendant Feng Han is the CEO of Elastos, which he co-founded. Id. ¶ 17. He is also a member of the company's board. Id. From at least February 2018, until September 2018, Han was a “Writing Scholar and Research Associate at Columbia University” in New York, New York. Id. Han resided in Cambridge, Massachusetts from September 2018 until at least the inception of this action. Id. Han received service of the summons in this action at his residence in Cambridge, Massachusetts. Id.

Defendant Elastos is registered in Singapore and has its primary offices in Shanghai and Beijing, China. Id. ¶ 15. By December 2017, Elastos maintained a significant presence in San Francisco, California. Id. By March 2018, Elastos maintained an official “base in Silicon Valley.” Id.

B. Founding of Elastos and Early Token Sales

The Individual Defendants founded Elastos in 2017. Id. ¶ 22. Through Elastos, the Individual Defendants sought to “create a new kind of internet, powered by blockchain technology.” Id. ¶ 18. Defendants' goal was to develop a platform of decentralized applications-connected to each other but not connected to the rest of the internet-to facilitate the ownership, purchase, and sale of digital assets without third-party companies like Amazon and Apple. Id. ¶ 18-19. As part of this effort, Defendants developed a cryptocurrency-ELA Tokens-to use as the exclusive currency on the Elastos platform. Id. ¶ 20.

Defendants conducted their initial efforts to drive investment in Elastos exclusively in China. In the summer of 2017, Elastos issued a “white paper” (written in Chinese) explaining the Elastos

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platform. Id. ¶ 23. Between August 10 and August 20, 2017, Elastos held a private investment sale in China. Id. ¶ 24. This sale-which Plaintiffs term an “Angel Investment” sale to “founders and key partners” of Elastos-raised approximately 4, 300 Bitcoins and released approximately six million ELA Tokens. Id.

Following its private sale, Elastos planned to conduct an Initial Coin Offering-or ICO-in China. Id. After the ICO, Elastos planned to allow global investors to purchase ELA Tokens on secondary exchanges. Id. Those plans, however, hit a major roadblock when China banned ICOs on September 5, 2017. Id. ¶ 25.

C. January 2018 Token Sale

Following the ICO ban in China, Defendants decided to open the ICO to anyone except Chinese citizens. Id. In November 2017, Defendants began actively promoting the Elastos platform in the United States. Id. To facilitate that effort, Elastos established a physical presence in San Francisco. Id. ¶ 26. Elastos also shifted its promotional efforts from China-based social media to U.S.-based and English language social media. Id.

As early as November 29, 2017, Defendants promoted Elastos through the company's official Twitter account-@Elastosorg. Id. ¶ 27. At the same time, Han and Elastos' CMO, Fay Li, began promoting Elastos through their personal Twitter accounts. Id. Many of the tweets published by Defendants and Li contained the “cashtag”^[1] $ELA. Id. ¶ 28. Use of the cashtag in a tweet indicated to those who read it that the tweet related-in part-to ELA Tokens. Id. The cashtag also allowed Twitter users seeking additional information about ELA Tokens to easily find Defendants' tweets by simply searching for the cashtag. Id.

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In addition to the tweets, Defendants participated in in-person marketing efforts throughout the United States. Id. ¶ 26. These efforts included sending Elastos representatives to blockchain and cryptocurrency conferences and expos, as well as organizing informational “meetups” designed to educate potential investors about Elastos. Id. Those meetings and presentations took place from November 2017 through December 2017 in Silicon Valley; Santa Clarita, California; San Francisco, California; and New York, New York. Id. ¶¶ 29-32.

On December 24, 2017, Elastos posted responses to “Frequently Asked Questions” from investors interested in ELA Tokens on a New York City-based and Virginia-headquartered blockchain blogging and social media website-Steemit.com. Id. ¶ 33. In response to the question “Can U.S. citizens buy Elastos tokens? How can I do that?, ” Elastos wrote: “After Elastos completes all of the legal and regulatory procedures, you can register for the whitelist^[2] on our official site to buy our tokens. This applies not only for U.S. citizens, but for all except Chinese citizens.” Id.

On December 26, 2017, Elastos posted an article on the San Francisco-based online publishing platform Medium.com titled “An Introduction to Elastos.” Id. ¶ 34. That same day, Elastos posted a transcript from a November 2017 interview of Chen. Id. ¶ 35. In the interview, Chen stated that “we are in the last stages of preparing for an Initial Coin Offering of our ELA token.” Id. On December 27, 2017, Elastos again posted a response to a “Frequently Asked Question” on Medium.com. Id. ¶ 36. In response to the question “Can U.S. citizens buy Elastos tokens? How can I do that?, ” Elastos wrote: “Elastos Foundation adheres to [the] highest standards in many regulating nations across the world. We have gone through due diligence analysis from leading law firms in California, U.S. and we will be opening our token sale to U.S. residents through a whitelist process.” Id. That same day, Elastos posted messages on blockchain and cryptocurrency

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forum Bitcointalk.org. Id. ¶ 37. A Bitcointalk.org user responded to one of the posts, asking when the Elastos ICO would begin. Id. Elastos wrote that “[t]he first token sale [will start on] January 1, 2018” and then stated that trading on a secondary market platform-Huobi.pro-would begin on February 1, 2018. Id.

On December 28, 2017, Elastos issued a press release through North Carolina-based news agency Accesswire. Id. ¶ 38. The press release-titled “Elastos ICO Offers a Cross-Platform Operating System and Public Blockchain Designed for a Smart Economy”-stated that the Elastos ICO would launch in the first week of January 2018. Id. The press release also included six contacts for potential investors to access more information, including the Elastos Investor Relations email address, the Elastos webpage, the Elastos Twitter feed, the Elastos Facebook page, and the Elastos Reddit page. Id.

Along with the posts and press release, in late December 2017, Elastos published an English-language White Paper (the “ICO White Paper”) to its website. Id. ¶ 39. The ICO White Paper stated, in relevant part: “The investor community is the backbone of Elastos, and it will support and facilitate Elastos development. All the raised cryptocurrency will belong to the Elastos Foundation, and it will be used to develop the Elastos platform.” Id. ¶ 120. The ICO White Paper included a description of the Elastos platform, as well as an explanation of the ELA Token distribution system. Id.

Contemporaneous with the publication of the ICO White Paper, Elastos launched the website “tokensale.elastos.org.” Id. ¶ 40. This website contained information for potential investors in ELA Tokens, including a link to the ICO White Paper, answers to “Token sale FAQ[s], ” and a link to register for the whitelist. Id.

Whitelist registration opened on January 1, 2018. Id. ¶ 44. Potential investors could register on the whitelist from January 1, 2018 until January 15, 2018, or until 10, 000 investors registered. Id.

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Elastos stated that the ICO price would be 1 Bitcoin for 800 ELA Tokens. Id. Investors could also pay with NEO-another cryptocurrency-at a rate not specified in the Amended Complaint. Id. On January 4, 2018, Elastos closed its whitelist registration after receiving 11, 915 submissions from interested investors. Id. ¶ 47.

Between January 2, 2018, and January 30, 2018, Elastos posted links to the ICO White Paper, provided instructions on how to participate in the ICO, reminded its followers on social media platforms of the dates and deadlines for the ICO, urged its social media followers to participate in the ICO, and posted links to articles describing the Elastos ICO and the Elastos platform. Id. ¶ 43.

On January 2, 2018, “The NEO News Today” podcast published an interview with Chen in which he discussed the ICO. Id. ¶ 41. Chen directed potential...