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Lawsuit alleges underuse of fake interest-creating bots

Stephen D. Palley

Disclaimer: These summaries are provided for educational purposes only by Nelson Rosario and Stephen Palley. They are not legal advice. These are our opinions only, aren’t authorized by any past, present or future client or employer. Also we might change our minds. We contain multitudes.

As always, Rosario summaries are “NMR” and Palley summaries are “SDP". Their guest poster Steven Middlebrook can be found on twitter at @stmdc

[related id=1]Anotek LLC v. Venture Exchange, SCS (Delaware Superior Court, Case No. N19C-04–211 JRJ) [SDP]

There’s a probably apocryphal story about a guy who went to the police after his cocaine was stolen and tried to file a police report. I am not saying that anyone in this lawsuit did anything illegal, but I was reminded a little bit of that story as I was skimming through this lawsuit and the contract that is attached to it because it’s … well … let’s get to it.

So, the plaintiff is a Delaware LLC called Anotek and the defendant is a Luxembourg company named Venture Exchange, SCS. According to the lawsuit, the case arises out a breach of an agreement by Anotek to provide services to Venture for some kind of token sale “associated with cryptocurrency” (whatever the heck that means).

The Complaint alleges that in exchange for providing services described in the agreement, Anotek was entitled to (1) 2.25 percent of the funds raised after “each token sale round”, (2) .25 percent if Anotek got a fellow named “Alexander Ivanov or [a] person of similar recognition to serve as an advisor to Venture, or to publish a photograph and positive comment on Venture’s website, and (3) .5 percent of the total “token supply” for making introductions and creating partnerships with “any of the top 100 cryptocurrencies.”

According to the Complaint, Venture didn’t “take any affirmative steps to move the token sale forward” but was happy with Anotek’s work. Anotek says that it made introductions to Sasha Ivanov from Waves and Brendan Blumer from Block.One, turned away other business opportunities, didn’t market/sell or distribute its proprietary software that it expected Venture was use to “tokenize” its assets (unclear what exactly that means).

Even thought the complaint says at one point that the token sale never moved forward, later in the complaint Plaintiff says that Venture actually raised $3 million from selling tokens and that it’s entitled to payment of the commission set forth in the Agreement. There are three counts — breach of contract, breach of the implied convenant of good faith and fair dealing (sort of an implied agreement in every contract that the parties will act in good faith) and unjust enrichment, which is an equitable claim that is sort of an alternative to a contract claim when for whatever reason a contract claim won’t get you over the finish line.

And about that contract? This is honestly the strangest part of what is otherwise a fairly run of the mill contract dispute.

So let’s set aside the legality of a contract that gives the plaintiff the right to a percentage of the gross proceeds of a token sale that might or might not be a securities offering. The scope of services here includes the creation of “automated bots which will create a vivid activity [sic.]” on social media “to potentially increase the project’s attractiveness to investors.” Oh, and if one social media platform restricts the bots, then the plaintiff agreed to send bots to Telegram to do the same thing. In other words, part of what Plaintiff is suing for is the failure to be paid for creating fake interest in a token sale to induce people to buy into it.

Now it could be that this Delaware LLC only provided ICO services in a place where it’s totally legitimate to use deceptive and misleading tactics to induce people to buy products or securities. There’s not very much on the interwebs about either the plaintiff or the defendant (though it turns out that the plaintiff sued another Luxembourg token sale purveyor called Cryptotickets in federal court in Delaware last year, and settled soon after the lawsuit was filed). As a general rule in the U.S., though, creating fake interest in a securities offering or a product in order to induce purchaser interest is problematic at best, which is why I was really surprised to see that contract filed in court in publicly available.

Anyway, maybe it’s me but it seems strange to go to Court to seek to enforce a contract that includes performance obligations that are sketchy at best. And that is why that apocryphal story came to mind when I read this thing.

The Block is pleased to bring you expert cryptocurrency legal analysis courtesy of Stephen Palley (@stephendpalley) and Nelson M. Rosario (@nelsonmrosario). They summarize three cryptocurrency-related cases on a weekly basis and have given The Block permission to republish their commentary and analysis in full. Part III of this week's analysis, Crypto Caselaw Minute, is above.