Hastings v.. Unikrn,Inc. Et Al. Case No. 18–2–20306–6 Sea (Superior Court of Washington for King County August 13,2018)

A blockchain is an electronic distributed ledger or list of entries—much like a stock ledger—that is maintained by various participants in a network of computers. Blockchains use cryptography to process and verify transactions on the ledger, providing comfort to users and potential users of the blockchain that entries are secure.” Well‐known examples of blockchain technology are the blockchains underlying the Bitcoin (“BTC”) and Ethereum (“ETH”) virtual currencies.

The general idea is that each “block” contains information, such as details on transactions that are made. After a “block” is created the information inside of it cannot be changed. The “block” then becomes part of the “blockchain” and an encrypted version of the information contained therein becomes publicly available along with all the previous “blocks” in the chain. After this process is complete, another block is created with additional information and so on.

To date, most “blockchains” are used to record transactions involving virtual currencies, such as Bitcoin and Ethereum. However, a “blockchain” could be used to record all ypes of information. For example, a blockchain could be used for deed recordation/transfers or even transfers of stock certificates.

Blockchain technologies and distributed ledgers may be used to create and disseminate virtual “tokens” or “coins.” A token or coin may entitle its holders to certain rights related to an underlying venture, such as rights to profits, shares of assets, rights to use certain services provided by the issuer, and/or voting rights. The tokens or coins may also be traded on digital currency exchanges, in exchange for virtual or fiat currencies. As the SEC has stated, based on these rights, “in certain cases, the tokens or coins will be securities and may not be lawfully sold without registration with the SEC or pursuant to an exemption from registration.”

An ICO is a capital raising event in which an entity offers investors a unique “coin” or “token” in exchange for consideration—most commonly in the form of established virtual currencies (typically BTC and ETH) or fiat currency. These tokens are issued on a blockchain and are oftentimes listed on online platforms, called virtual currency exchanges, where they are tradable for virtual or fiat currencies.

To participate in an ICO, investors are typically required to transfer virtual currencies to the issuer's address, online wallet, or other account. During an ICO, or after its completion, the issuer will typically distribute its unique “tokens” to the participants' unique address on the blockchain. Similar to stockholders in an initial public offering (“IPO”), holders of these tokens are then entitled to certain rights related to a venture underlying the ICO, such as profits, shares of assets, use of certain services provided by the issuer, and/or voting rights.

This Action alleges claims under Sections 12(a)(1) and 15(a) of the Securities Act [15 U.S.C. §§ 77l(a)(1) and 77o(a)], and is based solely on allegations of strict liability.

It is undisputable that Defendants offered and sold UKG Tokens. Defendants repeatedly acknowledged that they were selling UKG in exchange for ETH, and that UKG Tokens were meant to hold value on their platform.

Defendants have crafted a flimsy façade that UKG Tokens are not securities by claiming they are “utility tokens.” The artifice of this terminology had its clear genesis in a report the SEC published on July 25, 2017 regarding the DAO Initial Coin Offering, which involved DAO Tokens being offered in exchange for ETH investments. In this report, the SEC concluded that the DAO Tokens were securities. More specifically, the apparent genesis was in an article on inc.com that discussed the SEC's report on DAO, and stated that “if a token is not a security, but instead has an actual utility, then the ICO (Initial Coin Offering) may not have to register with the SEC since that would not necessarily be considered an ‘investment’ or a security.” Apparently, Defendants read this article and concluded that if they simply called the UKG Tokens “utility tokens” then they would magically not be securities.

In reality, the UnikoinGold ICO was an offer and sale of securities. Indeed, it is evident that investors were purchasing UKG Tokens with the expectation that those tokens would increase in value and become worth more than the virtual currencies invested. For example, investors in the Official UnikoinGold ICO purchased UKG Tokens with the expectation that the 866 UKG Tokens received would subsequently be worth more than one (1) ETH, or the equivalent of virtual currency invested.

Additionally, early investments in the Official ICO also carried a “minimum contribution purchase” of 0.1 ETH, which closely resembles a minimum investment amount in a standard securities offering.

Defendants themselves recognized that these UKG Tokens were securities and filed a SEC Form D Notice with the SEC for the sale of unregistered securities to investors residing in the United States. ¹¹ The Form D Notice describes the securities offered as “Simple Agreement for Future Tokens” (also known as a “SAFT”). It states that the offering amount is $20,000,000 and that the first sale of unregistered securities took place on September 19, 2017, just days before Defendants, including Unikrn Bermuda conducted the Official ICO that is the subject of this action. Plaintiff is informed and believes and based thereon alleges that the tokens that were the subject of these SAFTs were UKG Tokens.

When determining whether a security has been offered and sold, the focus must be on the economic realities underlying the transaction. Here, the economic realities are that Plaintiff and the Class invested ETH in order to receive UKG Tokens, which they were conditioned to expect would be worth more than their initial virtual currency investments. Indeed, Defendants often touted the potential profit to be made from investing in the UKG ICO.

For example, in a blog post on Medium, Rahul Sood refers to the UKG Token as an asset that is “poised to become the decentralized token for esports and gaming,” and promises that “[u]sers will get tons of use in esports, gaming, software, hardware, tournaments, teams, brands, betting and video games writ large.” He writes, “We simply need to have a crypto asset to keep up with our product's growth.” In an image within the blog, he acknowledges that the UKG Token will be convertible to Ethereum at selected cryptocurrency exchanges. He also writes that token buyers can use in‐game skins to buy UKG Tokens.

Defendants also note that they “have been working closely with [cryptocurrency] exchanges and will be referring our users to the ones they can trust,” and list a number of exchanges where UKG Tokens can be bought and sold.

On August 29, 2017, in Defendant Sood's AMA interview he confirmed that the UKG Tokens are meant to hold value and allow people to cash out and make money. Sood emphasizes that “buying a token, you're buying a product that we're selling that can be used on the Unikoin platform.” Sood reasons that tokens are not securities because “you are not getting equity in the company, you're not getting voting rights,” but Sood comments that it is important “to keep the token stable” so they can “justify the value over time, and constantly add new features to the platform,” and that people betting with the UKG Token “want to know that when they bet and they win, that they can cash out and they're going to be able to make money … ” He continues, “they want to feel comfortable that when they're holding and betting with the token, that there's stable value there. So for us, it's important to maintain stability.” (emphasis added).

Sood emphasizes that “Our priority is to sell to users more than anything else,” and “we want our users to feel comfortable that when they buy our token, they can use the token on the platform and they can use it across other platforms in e‐sports, and we want UnikoinGold to become a standard across e‐sports.” (emphasis added).

Sood says, “For us, our users care about this: they care about being able to purchase the token, use the token for betting, be able to come back two, three weeks later, and be able to sell that token,” and “have something of value when they walk away.” (emphasis added).

Defendants also made it clear that the purpose of the ICO was to raise capital to finance the development of the UnikoinGold project. Defendants sold over $15 million of UKG Tokens to private investors during a private “pre‐sale.” These investors included: Blockchain Capital, Coincircle, Mark Cuban, Draper Dragon, Pantera Capital, Binary Financial, and Alphabit Fund, among other strategic purchasers. Unikrn Bermuda acknowledged that these tokens were securities, filing a Form D notice for sale of unregistered securities to accredited investors for private pre‐sale of UKG Tokens. ¹² The pre‐sale UnikoinGold tokens were purportedly sold as SAFTs to 75 investors.

Defendant Sood discusses this pre‐sale in his You Tube interview. He mentions two different types of potential pre‐sale purchases; either through a SAFE, or a SAFT. With a SAFE, Sood mentions, “Investors can come in for equity or tokens if you want to have a round where you sell them a particular amount of tokens, for example. So you say, if you put an ‘X’ amount of money into our company, we'll either convert that to equity, or we'll give you some tokens. You can decide.” He explains SAFT, “we're going to give you a fixed price, pre‐allocation of tokens, and we're going to price it at a specific amount, but there's no equity component allowed with that. He continues, “These are typically big blockchain investors, or blockchain participants, or that sort of thing, or they're people in the community.” ¹³ (emphasis added).

As with other investments, investors in the UnikoinGold ICO incurred a risk of loss on their investment. In fact, the vast majority of ICO investors have sustained substantial losses with the value of UKG Tokens declining substantially since the ICO.

Investors in the UnikoinGold ICO, including Lead Plaintiff and the Class, made their investment with a reasonable expectation of profits, as described below.

First, Defendants themselves recognized, both implicitly and explicitly, that investors in the UnikoinGold ICO have a reasonable expectation of profit. For example, the UnikoinGold White Paper acknowledges “one of the bigger requests we've had from our users is adding more value to the Unikoin … ” (emphasis added). The UnikoinGold whitepaper also acknowledges that “upgrading this virtual currency to an Ethereum‐based utility token will dramatically increase usage and utility.” (emphasis added).

The UnikoinGold whitepaper indicates that the UKG Token will serve to create a “community‐driven virtual economy.” Virtual economies are markets that incentivize buying and selling of virtual goods for profit. UKG Tokens create a reasonable expectation of profit when used within a community‐driven virtual economy. Trading virtual goods is a lucrative multi‐billion‐dollar industry that creates profits for both platform operators and traders.

The UnikoinGold whitepaper also indicates that the UKG Token's value “may be affected by market conditions and other factors,” and recognizes, “[t]he value of the UnikoinGold will be affected by the demand for the token relative to its supply” and that UKG Tokens “[m]ay be purchased and sold through third‐party exchanges. (emphasis added). Defendants' plan to place the UKG Token in the cryptocurrency market, and onto exchanges, invited investors, traders, and speculators who are interested in using the UKG Token and the Unikrn Company's development and involvement in the UnkioinGold platform to profit from the value of the UKG Token.

In Defendant Sood's AMA interview on YouTube, he told the community, “we're going to continue to build a long‐term stable value in our token and our business. That is our priority, and that is why we exist.” (emphasis added).

When the AMA host asked Sood “Why put this on exchanges if this is not meant to be an investment?” Sood concedes:

People in the community want to go trade that token, they can go trade that token. They'll put it out on an exchange. It's no different than skins. If Valve has created an open market place for skins, and people can go to skin trading sites and trade those skins, and if they want to trade those skins at certain values for skins that are rarer than other skins, then by all means they can do that. For us, our priority is to build value in Unikrn, and to build stability within our token, and it is an ERC‐20 token, so people, our customers can go out and trade their tokens if they want to when they're done betting.” (emphasis added).

Sood wrote in one of his Medium blog posts, “Through our risk management we can create stability in the token and grow features and more utility over time.” (emphasis added).

Although Defendant Sood often mentioned stabilizing the value of UKG Tokens, the token has been anything but stable. The UKG Token initially lost nearly one third of its ICO value in terms of USD, dropping from approximately thirty cents ($0.30) to eleven cents ($0.11) on November 22, 2017. ¹⁴ The Token then appreciated rapidly, reaching $2.08 on or about January 07, 2018, before subsequently plummeting to five and a half cents ($0.005) at the time of filing this Complaint. The extreme volatility of the UKG Token price is a direct result of Defendants' approach to management of the ICO and ongoing Token sales, which invited investors, speculators, and traders to use the UKG Tokens as a means to make profit from their investment.

On December 12, 2017, Reddit user “coinspotting” made a Reddit post titled “A Request For Rahul Sood” in the /r/UnikoinGold subreddit where he asks for Defendants to return his Ethereum because of the volatility of the UKG Token that caused large losses to the value of the UKG Token. ¹⁵ UrbaneUKG, an official UnikoinGold subreddit moderator replied:

80% Loss? I don't think so. You do know that the value fluctuates and even though things have not gone as we would have liked doesn't mean your perceived loss will exist forever. If you don't have the patience to wait for what we have promised in the Roadmap that will increase demand, or for us to list on more exchanges which will change your value outlook, then I don't know what to tell you. (emphasis added).

Second, as alleged in Section D(4) the contributions received from investors were being pooled and managed by Defendants to fund projects that would increase the adoption of the UnikoinGold platform, thereby increasing the value of the UnikoinGold protocol and UKG Tokens.

Third, Defendants capitalized on Unikrn's previous success, celebrity endorsements, and large‐scale investment backers to increase demand and create a reasonable expectation of profit in the UKG Token. Additionally, Defendants' statements blurred the lines between equity investors in the in the Unikrn company and investors in the UKG Token to deceive purchasers and artificially inflate the perceived value of the UKG Token.

A document published by Unikrn announcing the UnikoinGold cryptocurrency emphasizes that, “[o]ur investors are excited about UnikoinGold and they're putting their weight behind it—however, we are saving room for our users and the crypto community.” (emphasis added). The document features a quote from Mark Cuban (celebrity billionaire, Shark Tank host, and owner of the Dallas Mavericks). Cuban said, “Hundreds of companies every year try to get me to invest, whether on Shark Tank or off camera. However, I only put my money and my name on the companies that I feel will be successful, truly advance an industry and have a leadership team that I respect. Unikrn fits all these requirements.”

On August 17, 2017, Defendant Sood once again emphasized this celebrity backing, tweeting, “Mark Cuban‐backed Esports betting platform Unikrn looks to sell $100M in cryptocurrency … ” ¹⁶ and linked to a “GeekWire” article that said, “Unikrn today announced that it will look to sell $100 million in cryptocurrency ‘tokens’ as part of an initial coin offering, or ICO.” ¹⁷ The article continues, “Those tokens can be exchanged for other major cryptocurrencies, such as Ethereum and bitcoin, which can then be exchanged for U.S. dollars.” The article also mentions how Unikrn is “partnering with CoinCircle for the ICO and will use the proceeds to help fund the growth of its business” and mentions that “Cuban said that he plans to participate in the ICO,” describing his investment strategy as “high risk, high reward.”

In his YouTube AMA interview, Defendant Sood once again highlights Defendants' celebrity investors, stating, “We've been running for nearly three years now. We raised ten million dollars … almost three years ago … We have investors like Mark Cuban, Ashton Kutcher, Shari Redstone, Elisabeth Murdoch, Binary, Tabcorp … We have these amazing investors who got behind us, who got behind this vision that this little company Unikrn was going to be the best bookmaker on the planet for e‐sports, and they believed in us, and they believed in our vision, and we've been kind of operating ever since. We're now generating revenue and if we continue to go the way we're going, we would have plenty of runway to last the next three years.” (emphasis added).

In an October 15, 2017 Medium blog post by Sood, he asks rhetorically, “First, who makes this token, and who backs it?” And answers his question:

We started Unikrn a few years ago with a $10 million investment from some incredible investors after identifying a significant gap in the market. Think of Unikrn as Las Vegas meeting the world's largest video game competitions. Ashton Kutcher, Elisabeth Murdoch, Guy O'Seary, Mark Cuban, Shari Redstone, and many others believed in our vision. (emphasis added).

Defendants' repeated references to wealthy individual backers as believers in Unikrn's vision was intended to, and did in fact, portray the UnikoinGold ICO as a good investment opportunity to retail investors. Sood admits as much, saying:

The investors in our company have a track record of picking winners, and the token sale itself is backed by Mark Cuban, Binary Financial, Blockchain Capital, Coincircle, Draper Dragon, Fenbushi, Pantera Capital, and many others … Our board of advisors includes Ethereum co‐founder Anthony Dilorio, and our team has already established and built a majorly successful operation in our space. (emphasis added).

There is no evidence to support the notion that the investment groups and individual backers of the UKG Token would be using the UKG Token to use on the UnikoinGold platform. Rather, Sood's statement lead UnikoinGold ICO purchasers to expect that the investment groups and individual backers were investing to profit from the appreciation of the UKG Token, and as such, that UnikoinGold ICO purchasers may also reasonably expect to derive profits by purchasing the UKG Token.

Finally, investors openly acknowledged their profit motive and focused on the potential profits from investing in UnikoinGold tokens, and Unikrn openly acknowledges the ability for UKG Token purchasers to trade the UKG Tokens for value on exchanges.

Ian Balina, a well‐known cryptocurrency investor who claims to have made millions of dollars from ICO investments, reviewed UnikoinGold's ICO on his YouTube channel

where he currently has over 117,000 subscribers. ¹⁸ In his video, he described UnikoinGold as a token that is “being hyped by Mark Cuban, because he is an investor.” He said, “I give them an 86%. I think they're an okay investment. In my opinion … I think it's a buy. Alright, so I will be investing in them and their pre‐sale.” In the video, Balina's “ICO Investing Spreadsheet” displays UnikoinGold as one of Balina's “Favorite Upcoming ICOs.” His spreadsheet also displays, “How much would I invest based on score?” Underneath, Unikrn is listed at a minimum amount of $4,500.00.

CrushCrypto, another ICO reviewer performed an “Analysis of UnikoinGold.” In her analysis, she rated UKG Tokens as “Neutral” for flipping, because “the project is very hyped up—this is the first ICO that Mark Cuban is involved in. However, hard cap of $100 million is very high.” ¹⁹ She also mentions that “[t]he amount of contribution depends heavily on the market environment … ” She rates UnikoinGold tokens as “Good” for long‐term holding, because “Unikrn has a large presence in the eSports scene … We believe the introduction of UKG tokens would attract crypto investors to try out the platform as they fit the target demography of Unikrn (mostly young male).” She also analyzes the token is good for long‐term holding because, “If Unikrn becomes successful, it has the potential to become the go‐to place for eSports betting and spectating, which is a huge industry in the long‐term.”

Team Epic, a cryptocurrency‐focused YouTuber also posted a “Unikoin Gold ICO Review.” ²⁰ In his video, he comments, “Pretty much, if it hits a dollar, you're gonna triple your money, so I'm lovin’ that. I'm gonna get involved with this … ” He continues later in the video, “from what I see, you can definitely make some money with this one … ”

As mentioned above in Section D2, Defendants planned to list the UKG Token on cryptocurrency exchanges to allow UKG Token purchasers to buy and sell the UKG Token for value. At the time this complaint was filed, UKG Tokens are listed on seven exchanges where purchasers, investors, and speculators can buy and sell UKG Tokens for the sole purpose of making profits. Buyers and sellers of the UKG Tokens can trade those tokens on these exchanges for fiat or digital currency without ever using the UKG Token on the UnikoinGold platform.

Plaintiff and the Class have entirely passive roles vis‐à‐vis the success of the UnikoinGold project and the UKG Token. The success of the UnikoinGold project, and the profits reasonably expected by the Class to be derived from the project, are dependent solely on the technical, entrepreneurial and managerial efforts of Defendants and their agents and employees.

From the outset, the Defendants were responsible for developing the UnikoinGold platform, establishing the UnikoinGold project, and choosing directors, managers, and all persons critical to UnikoinGold's success. Lead Plaintiff and the Class reasonably expected Defendants to provide significant managerial efforts, to develop and complete the UnikornGold platform, to develop and sustain a dApps and a supportive network after its launch, and to secure exchanges through which the tokens could be traded or liquidated. Through their conduct and marketing materials, Defendants repeatedly represented that they would be relied upon to provide the significant managerial efforts required to achieve these objectives and make UnikoinGold a success.

Although Defendants characterized UKG Tokens as “utility tokens” in later iterations of the White Paper, those tokens did not have any functionality at the time of the ICO.

Investors relied on Unikrn to take “primary responsibility for administering certain aspects of ongoing development related to UnikoinGold, Token Utility and the Platform.” Unikrn also stated that it would “provide certain administrative, technical and development services to [Unikrn Bermuda Ltd] in connection with ongoing development related to UnikoinGold, Token Utility, and the Platform.” The White Paper states that Unikrn “intends to make a variety of products and services available on the Platform,” and “will start to release some of these new features between 90–180 days after the token sale.” (emphasis added).

Defendants also concede that, “The proceeds of the Token Sale are intended to be used for the ongoing development of the Platform and associated open‐source software tools for users and developers to leverage the Platform, as outlined in the Company's Whitepaper … ”

Defendants also concede that, “The dissolution of Company may still adversely impact the Platform and the utility of UnikoinGold, given Company's role in developing the Platform and its anticipated role in contributing to the ongoing development of the Platform.”

Defendant Sood similarly stated that Defendants were, “going to take that money [raised in the ICO] and really pour it into development and just create the best crypto platform we can. A series of decentralized applications. We're going to have an amazing live betting experience where people can come on, they can take their UnikoinGold, they can deposit it on our platform, and then place micro bets on a game, watching for example, a League of Legends match, and being able to bet live in real time … and at the end of it they'll be able to cash in their winnings.” (emphasis added).

In this manner, Lead Plaintiff and the Class relied, and continue to rely, entirely on the technical, managerial and entrepreneurial expertise and efforts of Defendants and employees hired by them.