Clifford Chance

Are Your Tokens Outside US Securities Law Jurisdiction? Important Extraterritoriality Decision Handed Down by US District Court

28 September 2018

Token issuers often sell their securities offshore and consider such sales to be exempt from US securities regulation.  But this raises the question of location - are the token sales in fact outside the US for securities law purposes?  In In re Tezos Securities Litigation, a class action lawsuit brought by investors alleging that the tokens sold in the Tezos Initial Coin Offering were in fact securities, a federal court recently asked and answered the question: "where does an unregistered security [transaction], purchased on the internet, and recorded “on the blockchain,” actually take place?"

In the process, the court formulated a US federal securities law extraterritoriality analysis that – for what we believe is the first time ever – specifically takes the unique characteristics of blockchains into account. The court listed several factors that contributed to its determination that the sale of Tezos tokens had occurred in the United States, including that: US investors bought Tezos tokens; a website that sold the tokens was hosted in the US and run by a person located in the US; marketing efforts targeted US residents; and, most intriguingly, payments made in Ether for the Tezos tokens were validated by a network of Ethereum nodes clustered more densely in the US than in any other country. 

We anticipate that going forward, in deciding questions of jurisdiction over cryptocurrencies, ICOs, and other token offerings by issuers based abroad, US courts will, like the Tezos court, look to the location of blockchain validation nodes as a factor in determining whether the US securities laws apply. Given the logic of the Tezos court's reasoning, future US courts could also potentially look to the location of blockchain mining nodes as well, although the Tezos court itself did not.

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