On October 23, purchasers of TRX tokens survived a Motion to Dismiss that Tron Foundation (“Tron”) and its CEO, Justin Sun, filed in the Southern District of New York. See Hardin v. Tron Foundation, Case No. 20-CV-2804(VSB) (S.D.N.Y. Oct. 23, 2024). The putative class, consisting of domestic TRX purchasers, alleges that Tron sold TRX tokens in violation of Sections 5 and 12(a)(1)-(2) of the Securities Act in addition to the Blue Sky securities laws of every state other than New York and Delaware. Although the Court dismissed some of plaintiffs’ claims, the plaintiffs were – on their third try – finally able to plead around Tron’s jurisdictional, standing, and statute of limitations defenses. The Court’s opinion provides some additional guidance (and reinforces other, recent opinions) on jurisdictional and standing issues that commonly pop up in these types of token securities class actions.
Statute of Limitations
Defendants first argued that plaintiffs’ Section 12(a)(1) claim – the offer or sale of unregistered securities – was barred by the one-year limitations period. The Court quickly dispensed with that argument, noting that the named plaintiffs purchased TRX tokens on Binance within one year of filing the initial complaint.
A Section 12(a)(2) claim, based on the offer or sale of a security by means of a materially false prospectus or oral communication, also has a one-year statute of limitations. Although plaintiffs relied on a series of 2017 Tron whitepapers published more than one year before they filed suit, they argued that the “discovery rule” extended the limitations period. Specifically, they pointed to the SEC’s “Framework for ‘Investment Contract’ Analysis of Digital Assets,” published on April 3, 2019. According to plaintiffs, they did not know that TRX tokens were securities until after the SEC published its guidance. But the Court disagreed, holding that a non-binding SEC opinion letter was not a new “critical fact.” While the SEC’s non-binding interpretation of SEC v. W.J. Howey Co., 328 U.S. 293 (1946) – and its application to digital assets – may have helped plaintiffs craft their legal argument, it did not extend the limitations period.
Personal Jurisdiction
Tron is based in Singapore. Sun resides in China. Based largely on these two facts, defendants argued that the Southern District of New York did not have personal jurisdiction over them. In conducting its personal jurisdiction analysis, the Court first determined that both Tron and Sun had purposefully availed themselves of United States laws, citing:
(1) TRX promotions in, and directed to, the U.S. market via social media and other advertising channels;
(2) Sun speaking at multiple U.S. conferences about Tron and the TRX token; and
(3) Tron opening a California office and continuing to list TRX on domestic exchanges.
The Court also found that its exercise of jurisdiction over the defendants was reasonable given the U.S. judicial system’s interest in resolving alleged violations of federal statutes, important public policy concerning the allegations, and the plaintiffs’ residence in the U.S.
Standing
Plaintiffs only purchased TRX tokens on Binance, a secondary exchange. Because the plaintiffs never purchased the tokens directly from Tron, the defendants argued that the plaintiffs lacked standing to bring claims under Sections 12(a)(1) or 12(a)(2).
With respect to Section 12(a)(1), the Court cited binding Second Circuit precedent that it “applies to the unlawful sale of an unregistered security in an initial offering and in any subsequent sales.” Hardin v. Tron Foundation, 20-CV-2804 at *24 (S.D.N.Y. Oct. 23, 2024) (emphasis added) (citing S.E.C. v. Caledonian Bank Ltd., 145 F. Supp.3d 290, 306 (S.D.N.Y. 2015)). It refused to find that subsequent sales cannot be the basis for 12(a)(1) liability.
Section 12(a)(2), however, requires a showing that the plaintiff “purchases shares from an issuer ‘who offers or sells a security . . . by means of a prospectus.’” In re Wachovia Equity Sec. Litig., 753 F.Supp.2d 326, 373 (S.D.N.Y. 2011) (quoting 15 U.S.C. § 771 (a)(2). The Court noted that under “Second Circuit law, liability under Section 12(a)(2) hinges on the existence of a prospectus and therefore applies only to transactions made during an initial public offering and not aftermarket transactions.” Hardin v. Tron Foundation, 20-CV-2804 at *26 (S.D.N.Y. Oct. 23, 2024). As aftermarket purchasers of TRX, plaintiffs lacked standing to bring a Section 12(a)(2) claim.
Statutory Seller
Lastly, the defendants argued they are not “statutory sellers” under Section 12 of the Securities Act because they never sold TRX tokens directly to the plaintiffs. The statute imposes liability on any entity or individual who “successfully solicits the purchase of securities, so long as [it] is motivated at least in part by a desire to serve [its] own financial interests or those of the securities owner.” Balestra, 380 F.Supp.3d 340, 357 (S.D.N.Y. 2019) (quoting Pinter v. Dahl, 486 U.S. 622, 643 (1988)).
Here, the Court concluded that Tron and Sun – by publishing whitepapers, issuing press releases, and otherwise promoting the TRX tokens – engaged in the “steps necessary to the distribution” of TRX, thus making them “statutory sellers” under Section 12.
Takeaways
- Don’t rely on non-binding guidance from the SEC (or any other agency) to invoke the “discovery rule” to extend the statute of limitations. While an SEC Opinion Letter may help a potential plaintiff craft or articulate his legal theory, it does not constitute a new “critical fact” that extends the limitations period.
- This is not new, but promotions and advertisements directed at the U.S. market, even by wholly extraterritorial companies, can subject those companies to personal jurisdiction in U.S. federal courts. Appearances by corporate executives at U.S. conferences and events can also be used to establish “purposeful availment” of the U.S. legal system.
- Strictly secondary market purchasers may lack standing to bring Section 12(a)(2) claims against the token issuer.
- Token issuers may be deemed “statutory sellers” under Section 12 of the Securities Act even if the plaintiffs purchased the tokens on the secondary market.
For more information on digital assets, please contact Benjamin Kussman, Esq. at [email protected].
