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M ANATT , P HELPS &
P HILLIPS , LLP MOTION TO DISMISS
ATTORNEYS AT LAW CASE NO. 17-CV-06779-RS
S A N F R A N CIS CO
Case 3:17-cv-06779-RS Document 117 Filed 05/15/18 Page 2 of 23
1 TABLE OF CONTENTS
2 Page
3 I. ISSUES TO BE DECIDED ................................................................................................ 1
II. INTRODUCTION .............................................................................................................. 1
4
III. STATEMENT OF FACTS ................................................................................................. 3
5 IV. LEGAL STANDARD ......................................................................................................... 7
6 V. DISCUSSION ..................................................................................................................... 8
A. The First Count for Violations of Sections 5 and 12(a)(1) of the Securities
7 Act Fails to State a Claim Against the Draper Defendants ..................................... 8
8 1. Plaintiff’s Claim Under Section 5 Fails to State A Claim Because
There Is No Private Right of Action Under Section 5 ................................ 8
9 2. Plaintiff’s Claim Under Section 12 Fails to State a Claim Against
the Draper Defendants Because He Has Not Alleged that Either
10 Draper Defendant Solicited His Purchase of Tezos Tokens ....................... 9
11 B. The Second Count for Violation of Section 15 of the Securities Act Fails to
State a Claim Against the Draper Defendants Because Plaintiff Alleges No
12 Facts to Suggest that Either Had the Power to Direct the Management and
Policies of DLS or the Foundation ........................................................................ 12
13 VI. CONCLUSION ................................................................................................................. 16
14
15
16
17
18
19
20
21
22
23
24
25
26
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M ANATT , P HELPS &
P HILLIPS , LLP MOTION TO DISMISS i
ATTORNEYS AT LAW CASE NO. 17-CV-06779-RS
SAN FRANCISCO
Case 3:17-cv-06779-RS Document 117 Filed 05/15/18 Page 4 of 23
1 TABLE OF AUTHORITIES
2 Page
3
CASES
4
Ashcroft v. Iqbal,
5 556 U.S. 662 (2009) ....................................................................................................................7
1 TABLE OF AUTHORITIES
(continued)
2 Page
3 In re Deutsche Telekom,
2002 U.S. Dist. LEXIS 2627, 2002 WL 244597 ......................................................................15
4
In re Diasonics Sec. Litig.,
5 599 F. Supp. 447 (N.D. Cal. 1984) ...........................................................................................15
6 In re Flag Telecom Hldgs., Ltd. Sec. Litig.,
352 F. Supp. 2d 429 (S.D.N.Y. 2005) .......................................................................................15
7 In re Flag Telecom Holdings, Ltd. Sec. Litig.,
8 308 F. Supp. 2d 249 (S.D.N.Y. 2004) .......................................................................................15
In re Gilead Scis. Sec. Litig.,
9 536 F.3d 1049 (9th Cir. 2008).....................................................................................................7
10 In re GlenFed Securities Litig.,
60 F.3d 591 (9th Cir. 1995).......................................................................................................14
11
In re Immune Response Sec. Litig.,
12 375 F. Supp. 2d 983 (S.D. Cal. 2005) .......................................................................................12
13 In re Int'l Rectifier Corp. Sec. Litig.,
No. CV 07-02544-JFW, 2008 U.S. Dist. LEXIS 44872 (C.D. Cal. May 23, 2008) .................14
14 In re OSG Secs. Litig,
15 971 F.Supp 2d 387 (S.D.N.Y. 2013) .........................................................................................10
In re Rigel Pharm., Inc. Sec. Litig., Inter-Local Pension Fund GCC/IBT v.
16 Deleage,
17 697 F.3d 869 (9th Cir. 2012).....................................................................................................12
In re Splash Tech. Holdings, Inc. Sec. Litig.,
18 No. 99-0109, 2000 U.S. Dist. LEXIS 15369, 2000 WL 1727405 (N.D. Cal.
19 Sept. 29, 2000) ..........................................................................................................................14
In re Stratosphere Corp. Sec. Litig.,
20 1 F. Supp. 2d 1096 (D. Nev. 1998) ...........................................................................................14
21 In re Wells Fargo Mortg. Backed Certificates Litig.,
712 F.Supp.2d 958 (N.D. Cal. 2010) ........................................................................................14
22
In re Worldcom
23 377 B.R. 77 (Bankr. S.D.N.Y. 2007) ........................................................................................13
1 TABLE OF AUTHORITIES
(continued)
2 Page
3 Maher v. Durango Metals, Inc.,
144 F.3d 1302 (10th Cir. 1998).................................................................................................11
4
Me. State Ret. Sys. v. Countrywide Fin. Corp.,
5 No. 2:10-CV-0302 MRP, 2011 U.S. Dist. LEXIS 125203 (C.D. Cal. 2011) ...............10, 11, 12
6 Merck & Co. v. Reynolds,
559 U.S. 633 (2010) ..................................................................................................................15
7 Moss v. U.S. Secret Serv.,
8 572 F.3d 962 (9th Cir. 2009).......................................................................................................7
Paracor Finance, Inc. v. General Elec. Capital Corp.,
9 96 F.3d 1151 (9th Cir. 1996)...............................................................................................13, 14
10 Pinter v. Dahl,
486 U.S. 622 (1988) ..................................................................................................9, 10, 11, 12
11
Rosenzweig v. Azurix Corp.,
12 332 F.3d 854 (5th Cir. 2003).....................................................................................................11
13 Rubke v. Capitol Bancorp Ltd.,
460 F. Supp. 2d 1124 (N.D. Cal. 2006) ....................................................................................13
14 SEC v. CMKM Diamonds, Inc.,
15 729 F.3d 1248 (9th Cir. 2013).....................................................................................................9
SEC v. Todd,
16 642 F.3d 1207 (2011) ................................................................................................................14
17 SEC v. W.J. Howey Co.,
328 U.S. 293 (1946) ....................................................................................................................3
18
Steckman v. Hart Brewing, Inc.,
19 143 F.3d 1293 (9th Cir. 1998).....................................................................................................8
20 Steed Fin. LDC v. Nomura Secs Int’l, Inc.,
2001 U.S. Dist. LEXIS 1476 (S.D.N.Y. 2001) .........................................................................10
21 Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
22 551 U.S. 308 (2007) ....................................................................................................................8
Theoharous v. Fong,
23 256 F.3d 1219 (11th Cir. 2001).................................................................................................15
24 Travelers Ins. Co. v. Lewis,
756 F. Supp. 172 (S.D.N.Y. 1991) ............................................................................................15
25
U.S. v. Ritchie,
26 342 F.3d 903 (9th Cir. 2003).......................................................................................................8
27 Unicorn Field v. Cannon Grp.,
60 F.R.D. 217 (S.D.N.Y. 1973) ..................................................................................................9
28
M ANATT , P HELPS &
P HILLIPS , LLP MOTION TO DISMISS iv
ATTORNEYS AT LAW CASE NO. 17-CV-06779-RS
SAN FRANCISCO
Case 3:17-cv-06779-RS Document 117 Filed 05/15/18 Page 7 of 23
1 TABLE OF AUTHORITIES
(continued)
2 Page
3 Wanetick v. Mel’s of Modesto, Inc.,
811 F.Supp. 1402 (N.D. Cal. 1992) ..........................................................................................15
4
STATUTES
5
15 U.S.C. § 77k .........................................................................................................................12, 13
6 15 U.S.C. § 77e .....................................................................................................................3, 6, 8, 9
7 15 U.S.C. § 77h .................................................................................................................................8
15 U.S.C. § 77l ........................................................................................................................ passim
8
15 U.S.C. § 77o ....................................................................................................................... passim
9
15 U.S.C. § 78t(a) ...........................................................................................................................13
10 15 U.S.C. § 78u(a) ............................................................................................................................3
11 OTHER AUTHORITIES
12 17 C.F.R. § 230.405 ........................................................................................................................14
RULES
13
Fed. R. Civ. P. 12(b)(6) .................................................................................................................1, 7
14
15
16
17
18
19
20
21
22
23
24
25
26
27
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M ANATT , P HELPS &
P HILLIPS , LLP MOTION TO DISMISS v
ATTORNEYS AT LAW CASE NO. 17-CV-06779-RS
SAN FRANCISCO
Case 3:17-cv-06779-RS Document 117 Filed 05/15/18 Page 8 of 23
1 conclusory allegations are precisely the type of allegations that the U.S. Supreme Court has held
2 are insufficient to state a claim under Section 12 against an indirect seller. Instead, to state a
3 claim for soliciting the purchase of an unregistered security in violation of Section 12, the
4 plaintiff must allege not only that the defendant actively solicited the plaintiff’s purchase but also
5 that the plaintiff purchased the security as a result of the defendant’s solicitation. Here,
6 Plaintiff’s Complaint fails to approach that standard. Plaintiff makes no allegations that he
7 personally had any knowledge of or communications with either Draper Defendant or that any
8 alleged statement of the Draper Defendants had any impact on his decision to allegedly purchase
9 Tezos tokens. Absent such allegations, Plaintiff’s Section 12 claim for solicitation fails to state a
10 claim.
11 Plaintiff’s Section 15 claim that the Draper Defendants are liable as control persons for
12 the securities violations of DLS and the Foundation is similarly deficient. Plaintiff has not
13 alleged and cannot allege any facts that give rise to an inference that either Draper Defendant
14 meets the requirements of a control person under Section 15(a). The Complaint does not allege
15 any specific facts to suggest that either Draper Defendant had any specific or general control over
16 the actions of DLS or the Foundation that are the basis of the securities violations. Plaintiff has
17 not alleged and cannot allege that Draper was an officer, director or manager in either DLS or the
18 Foundation or that the Draper Defendants otherwise possessed the power to direct or cause the
19 direction of the management and policies of either DLS or the Foundation. Instead, Plaintiff
20 merely alleges that Draper Associates Crypto - the venture capital firm with which Draper is
21 associated - owns a minority stake in DLS. But such ownership in DLS is insufficient as a matter
22 of law to establish either Draper Defendant as a control person of DLS or the Foundation. In
23 short, Plaintiff’s conclusory allegations of control fail to state a Section 15 claim against the
24 Draper Defendants.
25 For these reasons and the reasons set forth more fully below, the Court should dismiss
26 Plaintiff’s Complaint against the Draper Defendants.
27
28
M ANATT , P HELPS &
P HILLIPS , LLP MOTION TO DISMISS 2
ATTORNEYS AT LAW
SAN FRANCISCO
CASE NO. 17-CV-06779-RS
Case 3:17-cv-06779-RS Document 117 Filed 05/15/18 Page 10 of 23
3 Tezos ICO conducted from July 1, 2017 through July 14, 2017 by the Foundation. Plaintiff
4 alleges that the Tezos ICO was a fundraising mechanism by which the founders of the Tezos
5 “blockchain” project sold Tezos tokens in exchange for cryptocurrencies. (Complaint, ¶ 2.)
6 Plaintiff alleges that the ICO raised the equivalent of $232 million in the digital currencies of
7 Bitcoin and Ethereum. Plaintiff alleges he invested 250 ether in the Tezos ICO on July 8, 2017.
8 (Complaint, ¶ 14.)
9 Plaintiff’s Complaint implicitly acknowledges that prior to July 25, 2017, the Securities
10 and Exchange Commission (the “SEC”) had never determined that a virtual coin or token was a
11 security subject to the federal securities law. The SEC first offered guidance on that issue in its
12 July 25, 2017 Release No. 81207 entitled “Report of Investigation Pursuant to Section 21(a) of
13 the Securities Exchange Act of 1934: The DAO.” (See Complaint, ¶ 82-83 and footnote 29.)
14 Nevertheless, Plaintiff alleges that the Tezos tokens qualify as securities under the U.S.
15 securities laws and, accordingly, the Tezos ICO constituted an offering and sale of securities.
16 Plaintiff specifically alleges that the Tezos tokens exhibit the hallmarks of a security under the
17 U.S. Supreme Court’s test set out in SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946) and
18 therefore an offering of Tezos tokens was required to be registered with the Securities and
20 violated 15 U.S.C. § 77e (“Section 5”), Section 12(a)(1), and Section 15 by failing to file a
21 registration statement with the SEC in connection with the sale of Tezos tokens in the ICO.
22 (Complaint, ¶ 10.)
23
24
25
2
Unless otherwise indicated, the following facts are taken from Plaintiff’s Consolidated
26 Complaint in this action (“Complaint”) (Doc. #108).
3
27 The Draper Defendants dispute Plaintiff’s allegations that the Tezos tokens are securities that
were required to be registered with the SEC and intend to challenge that claim in subsequent
28 proceedings.
M ANATT , P HELPS &
P HILLIPS , LLP MOTION TO DISMISS 3
ATTORNEYS AT LAW
SAN FRANCISCO
CASE NO. 17-CV-06779-RS
Case 3:17-cv-06779-RS Document 117 Filed 05/15/18 Page 11 of 23
1 Plaintiff alleges that each defendant had a different role in the ICO but concludes that the
2 Defendants “jointly conducted the Tezos ICO”. (Complaint, ¶¶ 44 and 45.) Plaintiff identifies in
3 paragraphs 46-64 the specific roles that he alleges each defendant had in the Tezos ICO.
4 Defendant DLS is the developer of Tezos and owns all of the Tezos-related intellectual
5 property, including the source code of the Tezos cryptographic ledger and the Tezos trademarks
6 and domain names. (Complaint, ¶ 46.) Defendant Arthur Breitman is the primary developer of
7 the Tezos cryptographic ledger. (Complaint, ¶ 20.) Defendant Kathleen Breitman is the Chief
8 Executive Officer of DLS. (Complaint, ¶ 21.)
9 The Breitmans and DLS established the Tezos Foundation to oversee the ICO and to
10 receive and manage all contributions. (Complaint, ¶ 48.) The Tezos Foundation and DLS
11 “jointly conducted the Tezos ICO.” (Complaint, ¶ 48.) Prior to the Tezos ICO, the Foundation
12 posted a “Transparency Memo” on tezos.com disclosing that the Foundation and DLS had a
13 contractual agreement in which the Foundation will acquire DLS and its intellectual property.
14 (Complaint, ¶ 47.) The Transparency Memo states that, provided that the Tezos blockchain
15 launches and operates successfully (as described in a whitepaper and technical papers) as a public
16 blockchain for a period of three months, DLS shareholders will receive (1) 10% of all Tezos
17 tokens (76.3 million tokens), which vest monthly over a period of four years; and (2) 8.5% of the
18 contributions received in the ICO. (Complaint, ¶ 79 and Transparency Memo referenced at
19 footnotes 17, 19 and 20 attached as Exhibit A to the accompanying Declaration of Christopher L.
20 Wanger (“Wanger Decl.”))
21 Draper is a venture capitalist and the founder of Draper Associates. (Complaint, ¶ 22.)
22 Plaintiff alleges that Draper “personally has a substantial ownership interest in Defendant DLS.”4
23 (Complaint, ¶ 22.) Plaintiff makes no allegation, nor could he, that Draper is an officer, director
24 or manager of, or holds any position at, either DLS or the Foundation. Plaintiff references
25 throughout his complaint the “Tezos Overview” document, which describes DLS and the Tezos
26 Foundation and the people involved with those entities. (See e.g., Complaint ¶¶ 17, 47, 48, 87,
27 4
Plaintiff fails to cite any source for this erroneous allegation. Draper does not personally own
28 any shares of DLS.
M ANATT , P HELPS &
P HILLIPS , LLP MOTION TO DISMISS 4
ATTORNEYS AT LAW
SAN FRANCISCO
CASE NO. 17-CV-06779-RS
Case 3:17-cv-06779-RS Document 117 Filed 05/15/18 Page 12 of 23
1 97, 103 and Tezos Overview document referenced at footnotes 5,18, 30, 37, 42 and 55 and
2 attached as Exhibit B to the Wanger Decl.) Draper is nowhere mentioned in that document.
3 Plaintiff alleges that Draper Associates Crypto is an entity associated with Draper that
4 holds shares in DLS. Plaintiff specifically alleges that Draper Associates Crypto is “a primary
5 shareholder in Defendant DLS” but acknowledges that Draper Associates Crypto acquired only a
6 “minority stake in DLS.”5 (Complaint, ¶¶ 23 and 38.) Plaintiff does not allege, nor could he, that
7 either Draper or Draper Associates Crypto owns a controlling stake in DLS. In fact, Draper
8 Associates Crypto holds a mere 10% interest in DLS and nothing in Plaintiffs’ Complaint
9 suggests otherwise.
10 In support of his allegations that the Draper Defendants had a role in the ICO, Plaintiff
11 alleges that the Draper Defendants “promoted the Tezos ICO.” (Complaint, ¶ 64.) Plaintiff cites
12 internet and other articles posted before the July 2017 ICO that “announced that Draper was an
13 early investor in the Tezos project.”6 For example, Plaintiff cites a May 5, 2017 article posted on
14 Reuters.com in which Draper is described as “an early supporter of bitcoin and its underlying
15 blockchain financial ledger technology” and is quoted as stating that he would participate in the
16 Tezos ICO. (Complaint, ¶ 61.) Draper is further quoted in the same article as saying, “The best
17 thing I can do is lead by example … Over time I actually feel that some of those tokens are going
18 to improve the world, and I want to make sure those tokens get promoted as well. I think Tezos is
19 one of those tokens.” (Id.)
20 Plaintiff alleges that “Draper’s announcement of his investment in the Tezos project
21 caused an explosion of investor enthusiasm for the Tezos project.” (Complaint, ¶ 105.) Plaintiff
22
5
Plaintiff erroneously alleges that Draper Associates Crypto “made an equity investment of
23 approximately $1.5 million in … DLS.” (Complaint, ¶ 38.) Plaintiff bases this allegation on a
misreading of an October 18, 2017 Reuters article that Plaintiff references in footnote 15 of his
24 Complaint. The article states that “[Draper] invested $1.5 million through his firm, Draper
Associates, which included taking a minority stake in DLS.” The true facts are that Draper
25 Associates Crypto alone invested $500,000 for a 10% interest in DLS. Separately, Draper
Associates Crypto and a related entity collectively contributed $1 million to the Tezos Fundraiser.
26 6
Plaintiff cites other articles in his Complaint that are dated after July 8, 2017 – the date that he
27 alleges that he invested in the ICO. Obviously, any such post-investment articles could not have
had any influence on and cannot constitute a solicitation of Plaintiff’s alleged investment in
28 Tezos.
M ANATT , P HELPS &
P HILLIPS , LLP MOTION TO DISMISS 5
ATTORNEYS AT LAW
SAN FRANCISCO
CASE NO. 17-CV-06779-RS
Case 3:17-cv-06779-RS Document 117 Filed 05/15/18 Page 13 of 23
1 goes on to quote or cite a handful of other pre-ICO articles that Plaintiff alleges “appeared
2 promoting the Tezos project and extolling the value of Draper’s financial backing.” (Id.) For
3 example, Plaintiff alleges that The Wall Street Journal reported in a July 7, 2017 article that
4 Tezos “was helped by having one prominent backer: Tim Draper, a founder of the Silicon Valley
5 venture capital firm Draper Fisher Jurvetson” and that Draper’s “small undisclosed personal
6 investment in the firm, and his public pledge to buy into the initial coin offering significantly
7 raised Tezos’ profile.” (Complaint, ¶ 62.) Plaintiff also quotes an article posted on
8 bitcoinist.com that stated “with Draper as a backer, the community will no doubt be eager to get
9 on board this latest offering.” (Complaint, ¶ 105.) Similarly, Plaintiff alleges that Bitcoin News
10 reported on May 6, 2017 that “Draper rightly believes that by participating in the ICO, he will be
11 setting an example for the rest of the investor community to follow the new age of fundraising”
12 and that “Draper’s participation in the ICO will not only encourage others to take part in it, but it
13 will also increase the chances of a successful completion of many crowdsales.” (Complaint, ¶
14 106.)
15 Based on foregoing allegations, Plaintiff concludes that “[i]n this manner [generally
16 described in paragraphs 48 through 63 of the Complaint], each of the [Draper] Defendants
17 directly or indirectly sold or offered Tezos tokens to investors” and that “each of the [Draper]
18 Defendants was a necessary participant and a substantial factor in the Tezos ICO.” (Complaint, ¶
19 64.)
20 Significantly, nowhere in his Complaint does Plaintiff allege that he knew of Draper or
21 Draper Associates Crypto prior to the ICO or that Plaintiff had any pre-ICO communications with
22 either Draper Defendant. Plaintiff also fails to allege that, prior to the ICO, he was aware of or
23 had read any of articles about Draper cited in his Complaint or that any action of either Draper
24 Defendant had any role whatsoever in Plaintiff’s decision to allegedly purchase Tezos tokens.
25 Plaintiff’s Complaint contains two counts. Plaintiff alleges in his First Count that each of
26 the Foundation, DLS, the Breitmans, and the Draper Defendants violated Sections 5 and 12(a)(1)
27 in connection with the Tezos ICO by offering, selling or delivering unregistered securities.
28 (Complaint, ¶ 140.) Plaintiff alleges in his Second Count that the Breitmans and the Draper
M ANATT , P HELPS &
P HILLIPS , LLP MOTION TO DISMISS 6
ATTORNEYS AT LAW
SAN FRANCISCO
CASE NO. 17-CV-06779-RS
Case 3:17-cv-06779-RS Document 117 Filed 05/15/18 Page 14 of 23
1 Defendants are liable as control persons for the securities fraud of DLS and the Foundation under
2 Section 15. (Complaint, ¶¶ 146-147.)
3 IV. LEGAL STANDARD
4 Federal Rule of Civil Procedure 12(b)(6) permits dismissal for “failure to state a claim
5 upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). To survive a Rule 12(b)(6) motion
6 to dismiss, the plaintiff must allege “enough facts to state a claim to relief that is plausible on its
7 face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). This “facial plausibility”
8 standard requires the plaintiff to allege facts that add up to “more than a sheer possibility that a
9 defendant has acted unlawfully.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Facts that are
10 “merely consistent with,” rather than suggestive of, a finding of liability will not support a
11 reasonable inference of violative conduct. Id. Pleading labels or conclusions is no longer
12 sufficient. Twombly, supra, 550 U.S. at 555. A plaintiff must allege sufficient factual matter to
13 “raise a right to relief above the speculative level.” Id. at 555, 570. “A claim has facial
14 plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable
15 inference that the defendant is liable for the misconduct alleged.” Id. “Threadbare recitals of the
16 elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. “In
17 sum, for a complaint to survive a motion to dismiss, the non-conclusory factual content, and
18 reasonable inferences from that content, must be plausibly suggestive of a claim entitling the
19 plaintiff to relief.” Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009) (citations
20 omitted).
21 In adjudicating a motion to dismiss under Rule 12(b)(6), the court is not required to accept
22 as true “allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable
23 inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008). The courts also
24 have distinguished between “facts” and “inferences” from facts and have held that the latter do
25 not have to be assumed to be true on a motion to dismiss. Kowal v. MCI Communications Corp.,
26 16 F.3d 1271, 1276 (D.C. Cir. 1994).
27 Although the Court is generally confined to consideration of the allegations in the
28 pleadings, “a document is not ‘outside’ the complaint if the complaint specifically refers to the
M ANATT , P HELPS &
P HILLIPS , LLP MOTION TO DISMISS 7
ATTORNEYS AT LAW
SAN FRANCISCO
CASE NO. 17-CV-06779-RS
Case 3:17-cv-06779-RS Document 117 Filed 05/15/18 Page 15 of 23
1 document and its authenticity is not questioned.” Branch v. Tunnell, 14 F.3d 449, 453 (9th Cir.
2 1994). Documents may be incorporated into a complaint when the plaintiff refers extensively to
3 the document or when the document forms the basis of the plaintiff's claims. Tellabs, Inc. v.
4 Makor Issues & Rights, Ltd., 551 U.S. 308 (2007); U.S. v. Ritchie, 342 F.3d 903, 908 (9th Cir.
5 2003). The court is not “required to accept as true conclusory allegations which are contradicted
6 by documents referred to in the complaint.” Steckman v. Hart Brewing, Inc., 143 F.3d 1293,
7 1295 (9th Cir. 1998).
8 V. DISCUSSION
9 A. The First Count for Violations of Sections 5 and 12(a)(1) of the Securities Act
Fails to State a Claim Against the Draper Defendants.
10
1. Plaintiff’s Claim Under Section 5 Fails to State A Claim Because
11 There Is No Private Right of Action Under Section 5.
12 Section 5, subdivisions (a) and (c) make it unlawful to offer or sell a security in interstate
13 commerce if a registration statement has not been filed as to that security, unless the transaction
14 qualifies for an exemption from registration. Specifically, Section 5 provides in pertinent part:
15 (a) Unless a registration statement is in effect as to a security, it shall be unlawful
for any person, directly or indirectly (1) to make use of any means or instruments
16 of transportation or communication in interstate commerce or of the mails to sell
such security through the use or medium of any prospectus or otherwise; or (2) to
17 carry or cause to be carried through the mails or in interstate commerce, by any
means or instruments of transportation, any such security for the purpose of sale or
18 for delivery after sale.
19
…
20
21 (c) It shall be unlawful for any person, directly or indirectly, to make use of any
means or instruments of transportation or communication in interstate commerce
22 or of the mails to offer to sell or offer to buy through the use or medium of any
prospectus or otherwise any security, unless a registration statement has been filed
23 as to such security, or while the registration statement is the subject of a refusal
order or stop order or (prior to the effective date of the registration statement) any
24 public proceeding or examination under section 77h of this title.
25
26 To establish a prima facie case for violation of Section 5, the SEC must show that (1) no
27 registration statement was in effect as to the securities; (2) the defendant directly or indirectly
28 sold or offered to sell securities; and (3) the sale or offer was made through interstate commerce.
M ANATT , P HELPS &
P HILLIPS , LLP MOTION TO DISMISS 8
ATTORNEYS AT LAW
SAN FRANCISCO
CASE NO. 17-CV-06779-RS
Case 3:17-cv-06779-RS Document 117 Filed 05/15/18 Page 16 of 23
1 SEC v. CMKM Diamonds, Inc., 729 F.3d 1248, 1255 (9th Cir. 2013). There is no private right of
2 action under Section 5; the only civil remedy available to private parties is that specified in
3 Section 12. Unicorn Field v. Cannon Grp., 60 F.R.D. 217, 223 (S.D.N.Y. 1973). Thus,
4 Plaintiff’s only potentially viable claim under Count One of the Consolidated Complaint is a
5 claim under Section 12.
6 2. Plaintiff’s Claim Under Section 12 Fails to State a Claim Against the
Draper Defendants Because He Has Not Alleged that Either Draper
7 Defendant Solicited His Purchase of Tezos Tokens.
8
Section 12 provides a private right of action for the solicitation or sale of securities in
9
violation of Section 5. Section 12(a) provides that "[a]ny person who . . . (1) offers or sells a
10
security in violation of [Section 5] . . . shall be liable . . . to the person purchasing such security
11
from him." 15 U.S.C. § 77l(a) (emphasis added). Defendants are liable under Section 12 for
12
transactions that violate Section 5 if they qualify as “sellers”. In re All. Equip. Lease Program
13
Sec. Litig., No. 98cv2150 J (NLS), 2007 U.S. Dist. LEXIS 12713, at *20 (S.D. Cal. Feb. 23,
14
2007) (brokers who solicited sale of securities and directly sold to plaintiffs are statutory sellers
15
under Section 12).
16
Section 12 provides relief only against a person who “offers or sells a security” and only
17
to the person “purchasing such security from him”. 15 U.S.C. § 77l. In 1988, the U.S. Supreme
18
Court clarified the definition of seller under Section 12 in Pinter v. Dahl, 486 U.S. 622, 653-644
19
(1988). In Pinter, the Court rejected the longstanding view of many courts that the term seller
20
extends to persons who were a “substantial factors”, “participants” in or the “proximate cause” of
21
the securities transaction. Instead, the Supreme Court held that Section 12(a)(1) applies only to
22
persons who (1) pass title to the security to the plaintiff; or (2) “solicit securities purchases”
23
provided that they are motivated at least in part by a desire to serve their own financial interests
24
or those of the securities owner. Pinter, supra, 486 U.S. at 646-647. The Pinter Court concluded
25
that the statutory language of Section 12 made it clear that Section 12 is not intended to embrace
26
“those who merely assist in another’s solicitation efforts.” Id. at 651, n. 27. According to the
27
Pinter court, Congress did not intend to extend Section 12 primary liability to “collateral
28
M ANATT , P HELPS &
P HILLIPS , LLP MOTION TO DISMISS 9
ATTORNEYS AT LAW
SAN FRANCISCO
CASE NO. 17-CV-06779-RS
Case 3:17-cv-06779-RS Document 117 Filed 05/15/18 Page 17 of 23
1 solicitation, “Plaintiffs would have to plead active participation in the solicitation of the
2 immediate sale, a direct relationship between the purchaser and the defendant.” Id. at *36
3 (emphasis added) (citing Maher v. Durango Metals, Inc., 144 F.3d 1302, 1307 (10th Cir. 1998)).
4 The court found plaintiffs’ allegations that the defendants “promoted” the sale of securities and
5 participated in road shows to promote the stoke did not constitute active solicitation under Pinter
6 and were insufficient to state a claim under Section 12. Id. at *37. “Plaintiffs must include very
7 specific allegations of solicitation, including direct communication with Plaintiffs. [Citations
8 omitted.] As the Supreme Court stated in Pinter, ‘[b]eing merely a “substantial factor” in causing
9 the sale of unregistered securities is not enough to render a defendant liable.’” Id. at *37-38.
10 Similarly, in Fouad v. Isilon Sys., No. C07-1764 MJP, 2008 U.S. Dist. LEXIS 105870, at
11 *21-22 (W.D. Wash. Dec. 29, 2008), the court dismissed Section 12(a)(2) claims against issuer
12 defendants where the complaint alleged that the defendants merely issued and participated in
13 preparation of the Prospectus, and paid for and participated in road shows to promote the stock.
14 See also Rosenzweig v. Azurix Corp., 332 F.3d 854, 870 (5th Cir. 2003) (dismissing 12(a)(2)
15 claims where defendants did not “directly communicate with the buyer” or otherwise “assume[]
16 the ‘unusual’ role of becoming a ‘vendor’s agent’”); and Brody v. Homestore, Inc., 2003 U.S.
17 Dist. LEXIS 17267 at *17 (N.D. Cal 2003) (holding that allegations that defendants met with
18 potential investors and money managers and presented highly favorable information about the
19 Company were insufficient to establish the defendants as sellers within the meaning of Section
20 12).
21 Here, there is no allegation that the Draper Defendants “solicited” Plaintiff to purchase
22 Tezos tokens in any sense of that word. There is no allegation that either Draper Defendant urged
23 or encouraged Plaintiff to purchase Tezos tokens. There also is no allegation that Draper
24 prepared or provided any information to Plaintiff in connection with his alleged investment. In
25 fact, there is no allegation that Plaintiff knew of or had any communications or contacts
26 whatsoever with either Draper Defendant.
27 Instead, Plaintiff makes conclusory allegations that because Draper promoted the Tezos
28 ICO, he “was a necessary participant and substantial factor in the Tezos ICO.” (Complaint, ¶ 64.)
M ANATT , P HELPS &
P HILLIPS , LLP MOTION TO DISMISS 11
ATTORNEYS AT LAW
SAN FRANCISCO
CASE NO. 17-CV-06779-RS
Case 3:17-cv-06779-RS Document 117 Filed 05/15/18 Page 19 of 23
1 Plaintiff has employed the old standard rejected by the Pinter Court and has failed to include any
2 specific factual allegations to support a claim the Draper Defendants are sellers by solicitation.
3 Because Plaintiff has not alleged that either Draper Defendant successfully solicited his purchase
4 of Tezos tokens, Plaintiff has failed to state a claim under Section 12. See Baker v. Seaworld
5 Entm’t, Inc., No. 14cv2129-MMA (KSC), 2016 U.S. Dist. LEXIS 72409, *55 (S.D. Cal. 2016)
6 (citing Me. State Ret. Sys., 2011 U.S. Dist. LEXIS 125203) (plaintiffs’ “barebones allegations”
7 are insufficient to properly allege solicitation, when Plaintiffs fail to allege specific solicitation,
8 including any direct communication with Plaintiffs).
9 B. The Second Count for Violation of Section 15 of the Securities Act Fails to
State a Claim Against the Draper Defendants Because Plaintiff Alleges No
10 Facts to Suggest that Either Had the Power to Direct the Management and
Policies of DLS or the Foundation.
11
12 In the Second Count of the Complaint, Plaintiff asserts claims against the Draper
13 Defendants for control person liability under Section 15(a). Section 15, imposes secondary
14 liability on persons who control those who have committed violations of federal securities law.
15 15 U.S.C. § 77o; In re Immune Response Sec. Litig., 375 F. Supp. 2d 983, 1039 (S.D. Cal. 2005).
16 Therefore, to the extent Plaintiff fails to assert a valid claim under Section 12, his claim for
17 liability of controlling persons Section 15 fails as well. In re Rigel Pharm., Inc. Sec. Litig., Inter-
18 Local Pension Fund GCC/IBT v. Deleage, 697 F.3d 869, 886 (9th Cir. 2012) (Section 15 requires
19 an underlying primary violation of securities laws).
20 Section 15(a) provides as follows:
Every person who, by or through stock ownership, agency, or otherwise, or who,
21 pursuant to or in connection with an agreement or understanding with one or more
22 other persons by or through stock ownership, agency, or otherwise, controls any
person liable under sections 77(k) or 77(l) of this title, shall also be liable jointly
23 and severally with and to the same extent as such controlled person to any person
to whom such controlled person is liable, unless the controlling person had no
24 knowledge of or reasonable ground to believe in the existence of the facts by
reason of which the liability of the controlled person is alleged to exist.
25
15 U.S.C. § 77o(a).
26
15 U.S.C. § 77k creates civil liability for false registration statements and 15 U.S.C. § 77l
27
creates liability contained in prospectuses and communications.
28
M ANATT , P HELPS &
P HILLIPS , LLP MOTION TO DISMISS 12
ATTORNEYS AT LAW
SAN FRANCISCO
CASE NO. 17-CV-06779-RS
Case 3:17-cv-06779-RS Document 117 Filed 05/15/18 Page 20 of 23
1 Section 15 is similar to 15 U.S.C. § 78t(a) (“Section 20(a)” of the Securities and Exchange
2 Act of 1934). Both statutes provide that one who controls a person liable under another provision
3 of the Securities Act or Exchange Act is liable to the same extent as the controlled person (i.e.,
4 the primary violator). Although courts in the Ninth Circuit have stated that the “controlling
5 person” analysis is generally the same under Section 15 and Section 20, distinctions exist in
6 regard to “culpable participation.” In re Worldcom 377 B.R. 77, 103 (Bankr. S.D.N.Y. 2007).
7 For Section 20 claims in the Ninth Circuit, culpable participation is not required. See Howard v.
8 Everex Systems, Inc., 228 F.3d 1057, 1065 (9th Cir. 2000); see also Paracor Finance, Inc. v.
9 General Elec. Capital Corp., 96 F.3d 1151, 1161 (9th Cir. 1996) (for Section 20 claims, “the
10 plaintiff need not show the controlling person's scienter or that they 'culpably participated' in the
11 alleged wrongdoing”). For Section 15 claims, however, some California federal courts have held
12 that culpable participation is required. See In re Calpine Corp. Sec. Litig., 288 F. Supp. 2d 1054,
13 1081 (N.D. Cal. 2003) (“The Section 15 defendant must have exerted actual control and have
14 been a culpable participant in the alleged Securities Act violations”) (citing Durham v. Kelly, 810
15 F.2d 1500, 1503-04 (9th Cir. 1987); Rubke v. Capitol Bancorp Ltd., 460 F. Supp. 2d 1124, 1134
16 (N.D. Cal. 2006) (“To state a claim for control person liability under § 15(a), a plaintiff must
17 allege that the individual defendants had the power to control or influence the company, and that
18 the individual defendants were culpable participants in the company's alleged illegal activity.”)
19 (citing Durham, 810 F.2d at 1503).
20 To state a claim for “control person” liability under Section 15(a), the Ninth Circuit
21 requires a plaintiff to plead (1) a primary violation of Section 11 or Section 12; (2) that the
22 alleged controlling person possessed, directly or indirectly, the power to direct or cause the
23 direction of the management and policies of the individual allegedly liable for the primary
24 violation; and (3) that the defendant actively used this influence or control so as to be a “culpable
25 participant” in the primary violation. Knollenberg v. Harmonic, Inc., 152 F. App'x 674, 685 (9th
26 Cir. 2005); Howard v. Everex Sys., 228 F.3d 1057, 1065 (9th Cir. 2000); In re Splash Tech.
27 Holdings, Inc. Sec. Litig., No. 99-0109, 2000 U.S. Dist. LEXIS 15369, 2000 WL 1727405, at *15
28 (N.D. Cal. Sept. 29, 2000); see also 17 C.F.R. § 230.405 (defining “control” as “the possession,
M ANATT , P HELPS &
P HILLIPS , LLP MOTION TO DISMISS 13
ATTORNEYS AT LAW
SAN FRANCISCO
CASE NO. 17-CV-06779-RS
Case 3:17-cv-06779-RS Document 117 Filed 05/15/18 Page 21 of 23
1 direct or indirect, of the power to direct or cause the direction of the management and policies of
2 a person, whether through the ownership of voting securities, by contract, or otherwise”).
3 In general, the determination of who is a controlling person is a factual question,
4 involving scrutiny of the defendant’s participation in the day-to-day affairs of the corporation and
5 the defendant’s power to control corporate actions. Paracor, supra, 96 F.3d at 1161. However, a
6 plaintiff cannot simply base his claims on boilerplate allegations; he must provide some factual
7 support that defendants were in a position to control a primary violator. In re Int'l Rectifier Corp.
8 Sec. Litig., No. CV 07-02544-JFW (VBKx), 2008 U.S. Dist. LEXIS 44872, at *69 (C.D. Cal.
9 May 23, 2008). A plaintiff must allege more than the defendant's position and committee
10 membership. In re GlenFed Securities Litig., 60 F.3d 591, 593 (9th Cir. 1995). There must be
11 some showing of actual participation in the corporation’s operation or some influence before the
12 consequences of control may be imposed. Burgess v. Premier Corp., 727 F.2d 826, 832 (9th Cir.
13 1984).
14 In the Ninth Circuit, indicia of control include: "Whether the person managed the
15 company on a day-to-day basis and was involved in the formulation of financial statements,
16 which is sufficient to presume control over the transactions giving rise to the alleged securities
17 violation." SEC v. Todd, 642 F.3d 1207, 1223 (2011) (internal citations omitted); see also
18 Howard, supra, 228 F.3d at 1065. See also In re Wells Fargo Mortg. Backed Certificates Litig.,
19 712 F.Supp.2d 958 (N.D. Cal. 2010) (conclusory allegations that defendants exercised substantial
20 control over primary violator are insufficient without specific factual allegations that defendants
21 had the “power to direct or cause the direction of the management and policies” of the primary
22 violators). See also In re Stratosphere Corp. Sec. Litig., 1 F. Supp. 2d 1096, 1122 (D. Nev. 1998)
23 (“Plaintiffs have merely alleged that 'but for' the Underwriters' participation, the Stock Offering
24 could not have been accomplished. This type of proximate causation is not a sufficient basis for
25 ‘control person’ liability, which requires the exercise of actual power or influence over a
26 company.”) A plaintiff basing allegations on “control person” status must inform the defendants
27 who they are alleged to control and what acts or status indicate such control. Wanetick v. Mel’s of
28 Modesto, Inc., 811 F.Supp. 1402 (N.D. Cal. 1992)
M ANATT , P HELPS &
P HILLIPS , LLP MOTION TO DISMISS 14
ATTORNEYS AT LAW
SAN FRANCISCO
CASE NO. 17-CV-06779-RS
Case 3:17-cv-06779-RS Document 117 Filed 05/15/18 Page 22 of 23
1 It is well settled that minority stock ownership interest does not establish control person
2 liability under Section 15. See In re Flag Telecom Holdings, Ltd. Sec. Litig., 308 F. Supp. 2d
3 249, 274 (S.D.N.Y. 2004); In re Alstom SA, 406 F. Supp. 2d 433, 489 (S.D.N.Y. 2005) (stating
4 that “[m]inority stock ownership is not enough to establish control person liability, since minority
5 stock ownership does not give the owner the power to direct the primary violator”); In re Flag
6 Telecom Hldgs., Ltd. Sec. Litig., 352 F. Supp. 2d 429, 458-459 (S.D.N.Y. 2005) (ownership of 30
7 percent of voting shares and ability to appoint three of nine board members did not constitute
8 control); In re Deutsche Telekom, 2002 U.S. Dist. LEXIS 2627, 2002 WL 244597, at *6-*7;
9 Travelers Ins. Co. v. Lewis, 756 F. Supp. 172, 177 (S.D.N.Y. 1991); and In re Diasonics Sec.
10 Litig., 599 F. Supp. 447, 459 (N.D. Cal. 1984) (no basis for finding “control” over the corporate
11 defendant when defendant has never been a director and his stock holdings represent only a small
12 portion of the total outstanding stock).
13 In Theoharous v. Fong, 256 F.3d 1219, 1227-28 (11th Cir. 2001) (abrogated on other
14 grounds by Merck & Co. v. Reynolds, 559 U.S. 633, 643 (2010)), plaintiffs asserted a controlling
15 person claim against a significant minority shareholder of the offending corporation. The
16 plaintiffs relied exclusively on two facts: (1) that the defendant owned 39% of the allegedly
17 controlled corporation's stock; and (2) that an agreement guaranteed the defendant four of the
18 nine directorships of the corporation. Id. at 1227. Since these facts only established a minority
19 interest in the ownership and direction of the allegedly controlled corporation, the Eleventh
20 Circuit held that these facts alone did not establish the defendant's liability as a controlling person
21 of the offending corporation. Id. at 1227-28.
22 Here, the Plaintiff has failed to plead any facts that give rise to the inference that either
23 Draper Defendant possessed, directly or indirectly, the power to direct or cause the direction of
24 the management and policies of DLS or the Foundation. Plaintiff has not alleged and cannot
25 allege that Draper was an officer, director or manager of DLS or the Foundation or that he had
26 any role in the management or policies of DLS or the Foundation.
27 Plaintiff also has not alleged any facts that give rise to an inference that either Draper
28 Defendant has the power to control DLS or the Foundation. Plaintiff does not and cannot allege
M ANATT , P HELPS &
P HILLIPS , LLP MOTION TO DISMISS 15
ATTORNEYS AT LAW
SAN FRANCISCO
CASE NO. 17-CV-06779-RS
Case 3:17-cv-06779-RS Document 117 Filed 05/15/18 Page 23 of 23
1 that either Draper Defendant owns a controlling share of DLS or the Foundation. Instead,
2 Plaintiff merely alleges that Draper Associates Crypto holds a minority interest in DLS.
3 (Complaint, ¶ 48 – Draper Associates Crypto “made an equity investment …for a minority stake
4 in DLS.”) But such a minority interest cannot give rise to an inference that Draper Associates
5 Crypto, let alone Draper personally, possesses the power to control DLS. In short, Plaintiff has
6 not alleged and cannot allege any specific facts that give rise to an inference that either Draper
7 Defendant possesses the power to direct or control DLS or the Foundation. Instead, Plaintiff
8 makes the conclusory allegation that, by virtue of Draper Associates Crypto’s minority stake in
9 DLS, the Draper Defendants control DLS and the Foundation. Plaintiff’s allegations are the type
10 of allegations based solely on affiliation that fail to state a claim for control liability under Section
11 15.
12 VI. CONCLUSION
13 For the foregoing reasons, the Draper Defendants respectfully request that this Court
14 dismiss Plaintiff’s Complaint against them with prejudice.
15 Dated: May 15, 2018 MANATT, PHELPS & PHILLIPS, LLP
16
By: /s/ Christopher L. Wanger
17 Christopher L. Wanger
Attorneys for Defendants TIMOTHY C.
18 DRAPER and DRAPER ASSOCIATES V
CRYPTO LLC
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M ANATT , P HELPS &
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M ANATT , P HELPS & DECLARATION OF C WANGER ISO MOTION
P HILLIPS , LLP
ATTORNEYS AT LAW
TO DISMISS
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M ANATT , P HELPS & DECLARATION OF C WANGER ISO MOTION
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TO DISMISS 1
ATTORNEYS AT LAW
SAN FRANCISCO CASE NO. 17-CV-06779-RS
Case 3:17-cv-06779-RS Document 117-1 Filed 05/15/18 Page 3 of 27
EXHIBIT A
Case 3:17-cv-06779-RS Document 117-1 Filed 05/15/18 Page 4 of 27
Transparency memo
In the interest of full transparency and the spirit of Tezos’ values, Tezos
would like to share important details about the relationship between two
entities: Dynamic Ledger Solutions, Inc. and the Tezos Foundation. It
includes information about the use of contributed funds by the
Foundation, thus we urge contributors in the Tezos fundraiser to read
and understand it.
DLS has taken proactive steps to limit the Foundation’s risk in this
acquisition, specifically:
1
Case 3:17-cv-06779-RS Document 117-1 Filed 05/15/18 Page 5 of 27
The Tezos blockchain must launch and operate successfully as a public blockchain for
a period of three months before DLS’ shareholders can receive any compensation for
their shares.
It must work substantially as described in our white paper and technical papers and be
consistent with the features described to the community prior to the fundraiser.
Only at this point, and not before, DLS shareholders may exercise the
right to receive payment for their shares.
No payment will be made unless and until the terms in the preceding section of this
document have been met.
Once met, DLS’ shareholders will receive 8.5% of the contributions made during the
fundraiser.
In addition, DLS’ shareholders will receive a 10% allocation of the tokens in the genesis
block, placed in a smart contract that will vest monthly over a period of 48 months.
These criteria represent a far more transparent and equitable reflection
of the reality of the transaction.
2
Case 3:17-cv-06779-RS Document 117-1 Filed 05/15/18 Page 6 of 27
Foundation to reward past work is an impedance mismatch, and thus not optimal for
inviting competition.
4. A large subset of the projects conducting fundraisers (sometimes called "ICOs") today
are based on little more than a white paper and will remain in a development phase for
years. Participants in those fundraisers have no idea how much of their contributions
will be spent bringing those projects to fruition - if they ever reach that point. In contrast,
Tezos established a working testnet in February 2017 which can be accessed upon
request to assess the state of the completion of the Tezos project. Most of the
remaining development consists of performing security audits and improving the test
coverage of the project so it can confidently launch as a public blockchain.
Conclusion
The terms above balance risk and reward in a manner consistent with a
real product which we developed before asking any contribution. A vocal
minority of the cryptocurrency community have strong feelings regarding
the type of agreements they deem acceptable when launching networks,
and equally intricate models that they use to justify their position. The
Ethereum fundraiser, which helped Ethereum blossom into a successful
project with a vibrant community, was decried as “unconscionable” by
many a keyboard warrior. Tezos’ founders do not share this vocal
minority’s ethos, nor do we ask that those who embrace it take part of in
the Tezos fundraiser. We suggest instead that they find, and contribute
to, a project which does share their values. If you think our project is
cool, has merit, and elegantly solves an important problem using solid
technology, we hope you'll contribute.
3
Case 3:17-cv-06779-RS Document 117-1 Filed 05/15/18 Page 7 of 27
EXHIBIT B
Case 3:17-cv-06779-RS Document 117-1 Filed 05/15/18 Page 8 of 27
EXECUTIVE SUMMARY
tezos.com
Case 3:17-cv-06779-RS Document 117-1 Filed 05/15/18 Page 10 of 27
OF THE
experience that includes positions at March 2014 - Tezos development
Goldman Sachs, Morgan Stanley, The begins self-funded
Wall Street Journal, and Accenture. They August 2014 - Tezos Position Paper is
2
HISTORY
PRINCIPLES
CHAIN governance and maintenance often lead
to stagnation, shortages, and political
the “block-size debate” begins putting
governance on the front stage
June 2016 - The DAO is hacked,
deadlock. a hard-fork of Ethereum is soon
decided by the Ethereum Foundation
3 PEOPLE
In the case of pioneers like Bitcoin June 2016 - The pre-fork Ethereum
4 FUNDRAISER chain becomes Ethereum Classic and
and Ethereum, those challenges have splits the network
manifested themselves in situations that June 2016 - Andrew Miller joins as an
5 PLANNING
put too much power in the hands of core advisor
tezos.com philosophy.
Case 3:17-cv-06779-RS Document 117-1 Filed 05/15/18 Page 11 of 27
tezos.com
Case 3:17-cv-06779-RS Document 117-1 Filed 05/15/18 Page 14 of 27
tezos.com
Case 3:17-cv-06779-RS Document 117-1 Filed 05/15/18 Page 17 of 27
FUNDRAISER
4 FUNDRAISER
5 PLANNING
6 GOALS
crowdfund.tezos.com
tezos.com
Case 3:17-cv-06779-RS Document 117-1 Filed 05/15/18 Page 18 of 27
4.1 SCHEDULE a time dependent bonus. This bonus The average time between Bitcoin blocks
is meant to incentivize contributors is approximately 10 minutes, thus the
Following the example set by the not to delay their participation. The fundraiser is expected to last approximately
Ethereum Foundation, there is no cap bonus starts at 20%, meaning that two weeks, and each period of 400 blocks
on the amount of contributions that a contribution of 1 XBT will yield an roughly two days and eighteen hours.
will be accepted by the Foundation. allocation of 5,000 X (1 + 20%) = 6,000
This is done in order to ensure that XTZ and decreases progressively to The Foundation will manage the proceeds
participation is not limited only to 0% over 5 periods lasting 400 Bitcoin of the fundraiser and sell contributions
insiders or the “fast-fingered”. The blocks each. progressively throughout the fundraising
Tezos development team believes period in order to reduce the risk inherent
that an un-capped fundraiser will in holding cryptographic tokens.
promote a widespread distribution of
the tokens, a necessary prerequisite
1 HISTORY to launching a robust network.
2 PRINCIPLES
Though the amount of Tezzies 20%
3 PEOPLE allocated is denominated in bitcoins,
contributions may be made in ethers,
4 FUNDRAISER
that will be implicitely converted at
15%
5 PLANNING the prevailing rate on a best effort
basis. Contributions may also be 10%
Bonus
6 GOALS made through Bitcoin Suisse AG who
accepts fiat currencies and other
electronic tokens and will participate
5%
in the fundraiser on behalf of its
customers. 0%
The fundraiser will last for a period of 0-399 400-799 800-1199 1200-1599 1600-1999
2,000 Bitcoin blocks. Throughout this
period, a contribution of one bitcoin Bitcoin block #
(1 XBT) will lead to an allocation of
tezos.com five-thousand tezzies (5,000 XTZ) plus
Case 3:17-cv-06779-RS Document 117-1 Filed 05/15/18 Page 19 of 27
5,000 XTZ / XBT $893,201 worth $422,000 worth 10% over 4 years 10% over 4 years
+ up to 20% bonus + 20% bonus + 20% early bonus
tezos.com
Case 3:17-cv-06779-RS Document 117-1 Filed 05/15/18 Page 20 of 27
FOUNDATION PLANNING
A detailed layout based on different fundraising scenarios can be found in THE TABLE.
The Tezos Foundation will manage the 5.1 ENGINEERING 5.2 RESEARCH
contributions according to its purpose.
1 HISTORY Initially, the Foundation will budget The primary task of the Foundation The Tezos protocol currently
from four to six years, depending on is to ensure the functionality of the benefits from research in the formal
2 PRINCIPLES the amount raised. After this period, the network. To this end, the Foundation verification and programming
Foundation will phase itself out unless will, at a minimum, retain the original language communities at no cost.
3 PEOPLE
the community votes to keep it in development team at the current The initial development team of
4 FUNDRAISER existence through funding via tokens. annual cost of $900,000. This will Tezos has a strong philosophical
cover maintenance, as well as some commitment to formal verification
5 PLANNING The Foundation will have the discretion integrations and proposals. Over four and a keen interest in researching
6 GOALS
to pay for services it believes will years, this will cost the Foundation new consensus algorithms for
benefit the promotion of the Tezos $3.6 million. blockchains. The Foundation will
protocol, either in tokens or another look to fund research in this area
currency. This section outlines initial DLS partnered with OCamlPro, a with its endowment from the
team believes the Foundation should company based in Paris with deep fundraiser.
value, as well as the estimated costs for expertise in OCaml. Most of the
servicing each priority based on the developers working on Tezos have
proceeds of a fundraiser. PhDs in formal verification and
programming language theory.
tezos.com
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tezos.com
Case 3:17-cv-06779-RS Document 117-1 Filed 05/15/18 Page 22 of 27
LONG-TERM GOALS
Though our philosophy and All protocol changes should go holders, but it also acts as a proxy for
governance model constrains through the Tezos internal governance the most desirable properties, such as
how prescriptive the Foundation mechanism when possible. If a person security, fairness, or usefulness.
or party introduces a change via a The ideal Tezos community would
and the initial team can act,
hard fork, but that change could easily be intellectually rigorous without
we thought it was worth have been instigated inside of Tezos, sacrificing pragmatism and inclusive
1 HISTORY
documenting the types of the network should reject that change without tolerating belligerence. There
things the Foundation will and treat it as illegitimate. would be a focus on experimentation,
2 PRINCIPLES work to realize within the Tezos testing, and folding in the most useful
3 PEOPLE community. However, some decisions will and innovative technical tools for the
inevitably arise at a level that cannot community to use. The Foundation
4 FUNDRAISER be fully addressed within the network. does not endorse or look to facilitate
The founding team would like to have any immoral behavior such as fraud
5 PLANNING a certain ethos govern the network. or the instigation of violence on other
6.1 COMMUNITY beings or entities.
6 GOALS Namely, they believe the central goal
GOALS of the governance mechanism is to
protect the interest of each token Tezos should be comprised of a
Since Tezos has a built-in governance holder, irrespective of their stake, in community of serious thinkers,
mechanism, its protocol can evolve their capacity as a token holder. focused on preparing the most
and incorporate new innovations over effective upgrades to increase the
time. In other words, stakeholders can Generally speaking, this would mean utility of the Tezos token. The network
make and enforce decisions about favoring decisions that tend toward will reward these proposals by issuing
changes to the network using the increasing the value of the tokens. Not them new tokens upon acceptance,
network itself. only does this directly benefit token creating a robust pecuniary incentive.
tezos.com
Case 3:17-cv-06779-RS Document 117-1 Filed 05/15/18 Page 23 of 27
While Tezos permits the creation of App Coins, Right now, the Tezos development team is fascinated
we do not focus on them. If an application is with a new development in zero-knowledge proofs:
particularly valuable to the network, we believe STARKs. Unlike SNARKs, STARKs do not require a
1 HISTORY it should be folded into the protocol. Though trusted setup. They also rely on simpler mathematics
we do not know exactly yet which features will and are more efficient to compute. However, the
2 PRINCIPLES
be voted into the protocol level by the network, proof time of STARKs is still cumbersome.
3 PEOPLE some applications seem to have widespread
appeal in similar projects: prediction markets, DNS 6.3.2 PROOF-OF-STAKE
4 FUNDRAISER systems, on-chain node identity, debt networks (à
la Stellar), decentralized exchanges, file storage, The team is interested in researching different proof-
5 PLANNING
and cloud computing. More exotic or specialized of-stake consensus algorithms offering stronger
6 GOALS applications, such as the Numéraire project, are guarantees and scalability. This is a burgeoning
probably better fits for App Coins as they have less field and interesting proposals such as Ouroboros,
explicitly general appeal. Algorand, Honey Badger and Snow White have been
appearing at higher frequency.
Unproven systems ought to innovate at the leaves,
while tried-and-true features ought to have a way 6.3.3 INCENTIVE COMPATIBLE
to make the network more valuable by integrating GOVERNANCE
at the protocol level. This is not purely for the sake
of creating more valuable networks but also for Moving beyond technology, the Foundation will also
ensuring consistency of execution. try to sponsor research focusing on decentralized
tezos.com governance and incentive structures.
Case 3:17-cv-06779-RS Document 117-1 Filed 05/15/18 Page 26 of 27
Engineering Continue development with our Push work on v2 by the Directly hire additional talent Grow the team with other Hire talented teams of engineers and Deploy and silo several teams
current team. foundation. Attempt a secondary from ETH Zurich for full-time code experienced, academically designers to build direct consumer of engineers to build different
issuance in conjunction with the maintenance in Switzerland. oriented engineers. applications through strategic candidates for upgrades. Evaluate
release of the new version. acquisition of tech companies. empirically the best proposals and
Headcount merge them.
6 6 10 15
Yearly rate
$900 $900 $1,500 $2,250
Research Offer competitive salaries to attract Sponsor a leading computer
Continue our use of PhD Keep our current approach, Contract a team of academics In addition, join the IC3 team as a experts on formal verification to work science department with endowed
candidates to work on formal strategically engage the formal to research and help build v2 sponsor. exclusively on the protocol. Set up an professorships and extensive grants
verification. verification community. consensus algorithm, followed by institution a la IC3 in Europe. to graduate students in the field of
research on zk-STARKs. formal verification.
Yearly rate
$0 $0 $300 $700
Communications Sponsor an online magazine to cover Acquire mainstream print and TV
& Marketing Continue working with our Continue working with our Host an annual developer Conduct three annual developer major debates. Pay to publish a hash media outlets to promote and defend
communications consultancy. communications consultancy. conference in Europe and conferences (EU, US, Asia), of the Tezos blockchain in a reputable the use of cryptographic ledger in
retain current communications retain current communications outlet like the Financial Times or The society.
consultancy. consultancy, run ad campaigns. New York times (à la Guardtime).
Yearly rate
$120 $120 $370 $1,000
Legal Services Lobby municipalities and local Fund efforts to digitize and map
After the fundraiser, the Retain our counsel and start Retain our counsel and start Retain our counsel and start governments to use formally verified transaction logic from traditional
Foundation will pay for its own exploring, as a failsafe, alternative exploring, as a failsafe, alternative exploring, as a failsafe, alternative smart contracts as a form of binding legal prose to a Tezos language.
legal expenses through MME. legal structures or advocacy for legal structures or advocacy for legal structures or advocacy for legal contract.
the Foundation beyond the Swiss the Foundation beyond the Swiss the Foundation beyond the Swiss
Cryptovalley. Cryptovalley. Cryptovalley.
Yearly rate
$100 $250 $250 $250
Business Purchase a banking license and Negotiate with a small nation-state
Development Kathleen Breitman manages all Hire one strong former Hire two seasoned former Hire a blend of junior & senior deploy the Tezos blockchain as a the recognition of Tezos as one of their
non-technical efforts. management consultant to assist management consultants and a business development talent, as backbone for business operations. official state currencies, which would
in interfacing with vendors and community manager to engage well as a business development Experiment with automation using a immediately give Tezos favorable
service providers. with token holders. person in China and a community blockchain for basic processes. treatment in terms of financial
manager. regulation. Attempt negotiations to
Yearly rate purchase or lease sovereign land.
$0 $250 $450 $750
Education Offer student grants for conducting Run a development school with
Produce a series of online Produce in addition an OCaml Also run a quaterly Tezos school projects related to the Tezos ecosystem emphasis on functional programming
Michelson tutorials with videos MOOC geared towards increasing focusing on protocol development and subsidize OCaml education in and safe smart contract construction.
and exercises. our potential developer base. in OCaml and smart contracts. universities.
Yearly rate
$0 $50 $125 $350
Annual Rate $10,000 - 15,000 $20,000 and above
$1,120 $1,570 $2,995 $5,600
Case 3:17-cv-06779-RS Document 117-1 Filed 05/15/18 Page 27 of 27
Contact
contact@tezos.com
Case 3:17-cv-06779-RS Document 117-2 Filed 05/15/18 Page 1 of 2
8
UNITED STATES DISTRICT COURT
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FOR THE NORTHERN DISTRICT OF CALIFORNIA
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SAN FRANCISCO DIVISION
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IN RE TEZOS SECURITIES LITIGATION Master File No. 17-cv-06779-RS
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This document relates to the All Actions. [PROPOSED] ORDER GRANTING
14 MOTION OF DEFENDANTS TIMOTHY
C. DRAPER AND DRAPER ASSOCIATES
15 V CRYPTO LLC TO DISMISS
CONSOLIDATED COMPLAINT
16 PURSUANT TO FED. R. CIV. PROC.
12(b)(6)
17
Date: July 19, 2018
18 Time: 1:30 pm
19 Courtroom: 3, 17th Floor
Judge: Hon. Richard Seeborg
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ORDER ON MOTION TO DISMISS
CASE NO. 17-CV-06779-RS
Case 3:17-cv-06779-RS Document 117-2 Filed 05/15/18 Page 2 of 2
1 The Motion of Defendants Timothy C. Draper and Draper Associates V Crypto LLC (the
2 “Draper Defendants”) to dismiss under Fed. Rule Civ. Pro. 12(b)(6) the claims against them in
3 this action for alleged violations of Sections 5, 12(a)(1) and 15(a) of the Securities Act of 1933
4 came on regularly for hearing. After consideration of the arguments in favor of and in opposition
5 to the Motion, the Motion is hereby GRANTED. Plaintiff fails to allege that either Draper
6 Defendant solicited the purchase of securities by Plaintiff as required under Sections 5 and
7 12(a)(1). Plaintiff fails to allege that he had any knowledge of or direct contact with either
8 Draper Defendant or that any communication from them had any impact whatsoever on Plaintiff’s
9 alleged investment decision.
10 Plaintiff also fails to allege that either Draper Defendant is a “control person” under
11 Section 15(a). Plaintiff fails to allege any facts that give rise to an inference that either Draper
12 Defendant had any specific or general control over the actions of the alleged primary violators -
13 Defendants Dynamic Ledger Solutions, Inc. (“DLS”) or the Tezos Foundation (the “Foundation”)
14 - that form the basis of the alleged securities violations.
15 Plaintiff’s Complaint against the Draper Defendants is hereby dismissed with prejudice.
16 IT IS SO ORDERED
17 Dated: ______________ _________________________________
RICHARD SEEBORG
18 United States District Judge
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ORDER ON MOTION TO DISMISS 1
CASE NO. 17-CV-06779-RS