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Eleventh Circuit Affirms Dismissal Of Untimely Putative Class Action Relating To Celebrity-Backed Cryptocurrency Offering
06/29/2021On June 21, 2021, the United States Court of Appeals for the Eleventh Circuit affirmed the dismissal of claims under Sections 12(a)(1) and 15(a) of the Securities Act of 1933 (the “Securities Act”) against the co-owners of a company (the “Company”) that sold cryptographic tokens in an initial coin offering to fund its nascent movie streaming platform. Fedance v. Felton, No. 20-12222 (11th Cir. 2021). Although plaintiffs brought the action after the one-year statute of limitations period had elapsed, they argued that the Company’s fraudulent concealment equitably tolled the limitations period. The district court held that the claims were untimely because the doctrine of equitable tolling did not apply to claims brought under Sections 12(a)(1) and 15(a). Although the Eleventh Circuit agreed that plaintiffs’ claims were untimely, the Court rejected the district court’s conclusion that equitable tolling is inapplicable to Section 12(a)(1) and 15(a) claims. The Eleventh Circuit instead held that plaintiffs had not adequately alleged that the Company’s fraudulent concealment prevented them from bringing claims within the limitations period.
In August 2017, the Company—co-owned and promoted by “T.I.,” an Atlanta-based hip hop artist—launched its initial coin offering of cryptographic tokens. The Company did not register the tokens as securities with the Securities and Exchange Commission. During the ensuing months, the co-owners marketed the Company as a “growing multi-billion-dollar company” with major investments in film. However, in late 2017 and through 2018, the value of the tokens began to fall precipitously—from a peak of 35 cents per token to less than one cent. In April 2018, the Company announced that it had “missed [its] deadline” to launch the streaming platform and deleted its website. Several months later, the Company announced it had been acquired by another company.
In May 2019, plaintiffs filed suit—nine months after the one-year statute of limitations had elapsed. Plaintiffs argued that the action should not be dismissed as untimely because the Company had “fraudulently concealed the true nature of the [tokens]” by making fraudulent statements and omissions that the tokens had “actual utility” and were not securities. Plaintiffs claimed that they had not known the tokens were in fact securities until April 2019, when a Georgia district court ruled the tokens were securities in a similar lawsuit. The district court rejected plaintiffs’ arguments, holding that equitable tolling did not apply to plaintiffs’ claims.
The Eleventh Circuit first rejected the district court’s conclusion that equitable tolling principles are inapplicable to claims under Sections 12(a)(1) and 15(a). Specifically, the Eleventh Circuit explained that “the district court made the ‘all-too-common mistake’ of conflating the doctrine of fraudulent concealment, an equitable tolling doctrine, with the discovery rule.” The Court explained that, although Sections 12(a)(1) and 15(a) are not subject to the discovery rule, nothing in the statutory text prevents the application of the entirely separate doctrine of equitable tolling.
Next, the Eleventh Circuit held that plaintiffs had not adequately alleged that fraudulent concealment prevented them from bringing claims within the statute of limitations period. The Court held that all facts necessary for plaintiffs to know the tokens were an “investment contract,” and therefore a security, were available to plaintiffs during the initial coin offering or shortly thereafter, including that: (i) the Company repeatedly represented, and plaintiffs expected, that the value of the tokens would increase; and (ii) plaintiffs “rel[ied] on the technical and managerial efforts of others to affect the failure or success of the enterprise.” The Court held that the Company’s alleged efforts to conceal that the tokens were securities, by also marketing them as “utility” tokens that could be used to rent or purchase content through the streaming service, were irrelevant. As the Court explained, “[p]lenty of items that can be consumed or used—from cosmetics to boats to Scotch whisky—have been the subject of transactions determined to be securities because they had the attributes of an investment.”
