Class Action Lawsuit Filed Against Crypto Exchange Binance Over Unregistered Token Sales

News | May 27, 2024 By:

On Friday, May 10, 2024, a third amended class action complaint was filed in the United States District Court for the Southern District of New York against cryptocurrency exchange Binance and its founder Changpeng Zhao.

The complaint alleges that between July 2017 and the present, Binance violated federal and state securities laws by promoting, offering, and selling seven digital tokens – EOS, QSP, TRX, FUN, ICX, OMG, and ELF – on its exchange to investors in the U.S. without proper registration. These tokens are built on Ethereum’s ERC-20 technical standard and function akin to startup investments on blockchain networks.

According to the filing, Binance should have registered the tokens as securities with the SEC and relevant state authorities before facilitating their sale on the exchange. It also accused Binance of failing to register as a broker-dealer in violation of state laws. The plaintiffs, five individuals from Texas, Nevada, and California who purchased the tokens on Binance, are seeking to represent a class of similarly harmed investors who continually hold tokens bought on the exchange or sold them at a loss.

The lawsuit argues the tokens meet the definition of securities under the Howey Test established by the U.S. Supreme Court, as their value was tied to the managerial efforts of their issuers to develop their respective networks. It alleges that Binance directly sold tokens to investors and actively promoted token sales through various means on its exchange.

If proven, these acts would violate securities law provisions requiring public registration of securities offerings and broker-dealers. The plaintiffs are seeking damages in the amount of funds paid to purchase the tokens plus interest, as well as legal fees. They are basing their claims on both federal securities statutes and various state “Blue Sky” laws.

In recent years, the SEC has been stepping up its policing of cryptocurrency platforms and last year reportedly launched an investigation into Binance’s activities in the U.S. The complaint references the SEC recently determining that major token project EOS, which Binance facilitated trading of, was an illegal unregistered security.

The filing notes Binance and founder Changpeng Zhao have faced increased scrutiny over the company’s structure and compliance with global regulations. While headquartered in Malta in 2018, the country’s financial authority has since stated Binance is not licensed to operate there. In November 2023, both Binance and Zhao also pleaded guilty to federal criminal charges in the U.S. related to money laundering and sanctions violations.

Please contact BlockTribune for access to a copy of this filing.