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Block.one’s $27.5 Million Deal With Crypto Investors Nixed (1)

Aug. 16, 2022, 3:11 PMUpdated: Aug. 16, 2022, 4:58 PM

Blockchain technology developer Block.one’s proposed $27.5 million settlement with investors who allege it should have registered its coin offering as a securities sale doesn’t merit final approval because absent class members aren’t adequately represented, a federal court in New York ruled.

The “anonymous, decentralized environment” of blockchain technology obscures the proportion of the lead plaintiff’s and class members’ purchases that were subject to US securities laws, Judge Lewis A. Kaplan said Monday for the US District Court for the Southern District of New York.

And if that proportion is lower than the proportion of other investors’ US-governed transactions compared to foreign transactions, then the lead plaintiff—a cryptocurrency investment fund—could have an incentive to settle for a lower amount than the other investors would accept, he said.

Crypto Assets Oppportunity Fund LLC and other investors purchased Block.one digital assets called ERC-20 and EOS tokens during the company’s initial coin offering, they allege in two consolidated suits.

Block.one allegedly sold ERC-20 tokens to finance its development of new blockchain software.

It didn’t register the sale with the US Securities and Exchange Commission, disclaimed that the tokens were securities, and tried to prevent sales to US residents, the investors allege. But it promoted its tokens in the US market, and some ICO purchasers were in the US, they say.

Block.one and several individual defendants improperly failed to register with the SEC, made false statements about the technology, and pocketed some money, the investors say.

The court approved a conditional settlement class and granted preliminary approval to the settlement. Before the final approval hearing, it asked for data about foreign versus domestic sales in the Block.one ICO.

But CAOF provided “little to no information” on that issue, Kaplan said.

Absent class members who made entirely or mostly domestic purchases had no say in the negotiations to reduce the settlement to account for foreign purchases, he said.

Grant & Eisenhofer PA was lead counsel for the plaintiffs.

Davis Polk & Wardwell LLP and Waymaker LLP represented Block.one and the individual defendants.

The case is Williams v. Block One, 2022 BL 283888, S.D.N.Y., No. 20-2809, 8/15/22.

(Updated throughout with additional court analysis.)

To contact the reporter on this story: Martina Barash in Washington at mbarash@bloomberglaw.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Andrew Harris at aharris@bloomberglaw.com