Class Action Complaint for Violations of the Securities Act of 1933

Daniel Ocampo vs Dfinity USA Research LLC, Dfinity Stiftung, Andreessen Horowitz, Polychain capital, Dominic Williams, and John Does 1-20.

Note: this is not legal advice. I am not a lawyer. I do not have legal jurisdiction to officially determine whether ICP is a security or not. Opinions and ideas are my own.

I just spent the last few hours of my life reading a 41 page legal document outlining the case for this lawsuit. The purpose of this post is to (1) summarize everything to hopefully save you a few hours of reading dry legalese, but more importantly (2) to highlight the important aspects of the case and understand the implications.

The lawsuit makes its case in 213 bullet points. We obviously can’t go through each one here, so I’ll be picking and choosing based on what I think are the core elements of case.

What is a Security?

A security is an investment contract, and an investment contract is regulated by the SEC. To determine if something is a security, you use something called the Howey Test. The Howey test originated from the SEC vs Howey Supreme Court case in 1946.

The Howey test can be used to determine whether something is an investment contract (and thus a security). There are 4 prongs (or elements) to the test:

1. An investment
2. In a common enterprise
3. With a reasonable expectation of profit
4. To be derived from the efforts of others

If you can answer “Yes” to all four questions, then whatever you are assessing is likely an investment contract/security. But if you answer “No” to any of the questions, then whatever you are assessing is likely not a security.

What are the Assertions of the Lawsuit?

The main assertions (not my beliefs) of the lawsuit are:

1. The ICP utility token is in fact a security
2. The security was not registered with the SEC
3. Investors were mislead to believe it was not a security
4. Investors suffered incredible losses due to being mislead
5. Investors should get their invested money back
6. Investors should receive appropriations for damages received

This means the entirety of the lawsuit hinges on whether the ICP utility token is in fact a security. If it is, then they will likely win the suit and get some sort of compensation for their damages. If it is not, then there is no basis for the suit and nothing will happen.

Is the ICP Token a Security?

This is a hard question. If it were an easy question there would be no legal ambiguity, everyone would always know whether something was a security or not, and nobody would intentionally issue tokens as unregistered securities because if they did there would be severe consequences. Wouldn’t that be a nice world to live in.

As mentioned earlier, we use the Howey Test to determine if something is a security. You can read more detail in the, “Is My Token a Security?” article.

Although the Howey Test seems simple, it is incredibly nuanced in how it is interpreted. To help us answer the question of whether the ICP Token is a security, let’s turn to the Crypto Rating Council (CRC). The CRC came out with an asset rating framework that they used to unofficially rate tokens to determine whether they were more like a security (5/5 on the scale) or less like a security (1/5 on the scale). Bitcoin is a 1/5 on the scale, and Ethereum is a 2/5 on the scale. They provide a PDF of the framework they use to rate assets.

Using the CRC Asset Rating Framework on ICP

So, I used this framework to assess whether the ICP utility token is a security using my own best judgement to respond to each question. Then I compared responses with a few colleagues and we discussed the responses until we found a general consensus. You can view a read only copy of the framework and our answers here.

In the first sheet “Questionnaire”, you’ll see the questions in the framework along with our answers. If you scroll to the right, you will see the answers that I filled in based on the claims of the lawsuit.

On the next sheet “Results”, you will see the final computed values using the CRC Asset Rating Framework scoring methodology. Notice that with my answers ICP received a 2/5 score, and then when using the claims from the lawsuit, ICP received a 3.5/5 score.

A 2/5 score is on par with Ethereum, which is evidence that the ICP utility token has some attributes that make it seem less like a security. A 3.5/5 score is a little higher, but still suggests there is some evidence that it is not a security.

Both of these scores indicate that there are compelling reasons to believe that the ICP utility token is not a security.

Now a word of caution. 😀

[read at 2x speed] I am not a lawyer. This is not legal advice. The SEC and/or Supreme Court of California (where the lawsuit was filed) may see things differently and determine ICP is a security. I own and stake ICP. I purchased ICP after May 10, 2021 meaning I would fall into the “Other members of the class” group that would benefit from the success of the lawsuit, and the CRC Asset Rating Framework is to be used as a guide, not as a final determination on the status of any asset. [end read at 2x speed]

In the event that the ICP utility token is not a security, then the lawsuit has no merit and will be dismissed (not sure if dismissed is the right word, but you get the idea).

I hope you enjoyed the analysis! I’d love to hear questions or thoughts in the ICP Guide DSCVR Portal.