A few short months separated the most successful ICO of 2017 from a flood of legal actions against Tezos. Here’s a detailed look into this case.
In the fall of 2017, Tezos raised an astounding $232 million through an Initial Coin Offering (ICO), setting a record for the largest ICO ever at that time. However, instead of delivering the promised product, the founders became embroiled in public disputes. The resulting class-action lawsuits for securities fraud could set a concerning precedent for many ICO-funded companies.
The Early Days: A Dream Team’s Downfall
At its core, Tezos is the story of Kathleen and Arthur Breitman. Kathleen, who had experience working at Cornell University and consulting for companies like Accenture, teamed up with her husband Arthur to launch Tezos. Arthur, with a background in mathematics, had been fascinated by Bitcoin and, in 2014, wrote the Tezos white paper to create a self-amending cryptocurrency, a concept he believed would surpass Bitcoin and Ethereum in governance and adaptability.
While on their honeymoon, Arthur brought along a printed copy of Ethereum’s entire codebase. He saw Ethereum as a promising leap beyond Bitcoin, but he found its centralized governance problematic. This led him to envision Tezos as a more decentralized alternative.
Tezos Finds Its Way to Zug
In the crypto world, Arthur met Johann Gevers, a South African living in Switzerland, who suggested launching Tezos through an ICO. Gevers had previously founded the digital payment company Monetas and, after searching for a favorable legal jurisdiction, discovered Zug in Switzerland. With its low taxes and crypto-friendly environment, Zug became the perfect location for the Tezos project.
Zug’s legal framework, which allowed for the creation of non-profit foundations, provided a backdoor for launching an ICO. Through a foundation setup, Tezos could avoid regulatory scrutiny by positioning the ICO as a donation-based event, sidestepping the U.S. Securities and Exchange Commission (SEC). In theory, this would allow Tezos to function without the constraints of securities laws.
The Largest ICO to Date
Gevers became the president of the Tezos Foundation, while the Breitmans refrained from having direct control to maintain the appearance of a non-profit venture. Gevers held exclusive signing rights, and the foundation would use funds from the ICO to develop Tezos’s technology. The ICO raised $232 million, a sum that set a new benchmark for crowdfunding in the crypto space.
However, things quickly turned sour. The agreement between the Tezos Foundation and Dynamic Ledger Solutions (the Breitmans’ company) stated that the foundation would buy the software from them for a fraction of the ICO funds. Unfortunately, internal disputes soon took center stage. Gevers and the Breitmans began publicly fighting, accusing each other of incompetence, unethical behavior, and personal disagreements.
By late 2017, Tezos had become a chaotic affair, with no clear direction. The foundation was effectively left with only three directors, no employees, and open hostilities within the leadership. Despite the ICO’s success, the value of Tezos’s cryptocurrency, TEZ, nearly doubled, yet the project continued to face immense internal turmoil.
Legal Troubles Begin
In October 2017, the Breitmans attempted to remove Gevers from his position, but by then, the damage had been done. Tezos faced growing scrutiny from both the media and investors. Reuters uncovered that marketing materials for the ICO had exaggerated claims, and it became clear that many investors were not interested in Tezos’s platform itself but were simply using the tokens for speculative purposes.
This revelation led to the first class-action lawsuit against Tezos, accusing the company of selling unregistered securities. As Bitcoin, Ethereum, and other cryptocurrencies surged in value, Tezos was stuck in limbo, with no consensus on how to access its funds. The value of the ICO funds rose, but the project was unable to move forward.
The SEC and Tezos’s Legal Woes
Despite the ICO’s record-breaking success, the legal challenges didn’t end there. Tezos’s use of a donation-based ICO structure didn’t provide the legal protection its founders had hoped for. In August 2018, the SEC declared that Tezos’s ICO tokens were considered securities. This ruling allowed class-action lawsuits against Tezos to proceed, adding more legal pressure on the project and its founders.
The courts’ decision could have far-reaching implications for other ICO-funded projects, especially those in Zug. Tezos’s situation serves as a cautionary tale for companies hoping to avoid securities regulations by adopting creative legal structures.
The Fallout Continues
Tezos’s journey after these events hasn’t been smooth. Despite its ICO tokens reaching a value of $1.6 million, the Breitmans faced ongoing difficulties. The legal challenges from the SEC and other regulators have led to more lawsuits, with many speculating that the Tezos case could result in a wave of legal actions against ICO-funded ventures in Switzerland.
As the former COO of the Tezos Foundation put it, the situation reflected a community “cannibalizing itself.” In the end, Tezos’s rise and fall highlight the volatile and unpredictable nature of the crypto world.