The Curious Tale of Tezos —from a $232 MILLION ICO to 4 class action lawsuits.

Thijs Maas

Thijs Maas is a Dutch LLM student who developed a keen interest in the interplay between distributed ledger technologies and law. He started to help narrow the increasing gap between legal doctrine and regulatory challenges posed by blockchain-based asset classes.

Just 8 months ago, a blockchain project called Tezos raised $232 million with an initial coin offering. It was the biggest ICO ever. Arthur and Kathleen Breitman, the young couple that founded the project, literally raised over 10x more than their wildest estimates. 5 months later, the couple and the project is facing four class action lawsuits. How could it all go so wrong?

2017’s most hyped ICO

Tezos was promised as a cryptocurrency that would not have any governance issues.

The idea was cool: Tezos would allow any developer to come forth with technical improvements to the cryptocurrency’s codebase. There would then be a vote among all Tezos holders and, if it turned out positive, the change would be adopted and the developers would be awarded in ‘Tezzies’.

The rewards would attract developers from all around the world. The voting system would make sure that Tezos would not run into the governance issues that Bitcoin has been facing for the last couple of years. The project would even support the deployment of smart contracts (like Ethereum does) and with Tim Draper as an investor, the project seemed to be legit.


picture of contribution page Tezos
Tezos raised over 65.000 Bitcoin and 361.000 Ether!
As many blockchain companies do, the Breitmans set up a Foundation in Switzerland. The jurisdiction’s relative legal certainty and history of laissez-faire banking regulation has traditionally made it an attractive option for blockchain companies. Tezos showed why this is not always the case.

The funds raised during the ICO, which are now worth more than half a billion USD due to appreciation of the price of Ethereum and Bitcoin, were received by the Tezos Foundation.

The Breitman couple themselves however are not part of this foundation. Instead, the Breitmans own a company incorporated Delaware, called Dynamic Ledger Solution, Inc. (DLS).

The idea was that, once the ICO was a success, the foundation would buy DLS and all its property rights. The Breitmans and their investors were to receive 8.5% of all funds raised, as as well as 10% of all tokens. In other words, they would stand to receive about $40 million USD.


Arthur and Kathleen Breitman at an event
Arthur and Kathleen Breitman
Trouble in paradise

Swiss law requires foundations and its board members to be independent. As the Foundation would buy the IP rights from the Breitmans’ US corporation, it was impossible for the Breitmans to sit on the Foundation’s board.

As such, they appointed Johann Gevers, the founder of the Crypto Valley association in Zug, as head of the board. This is where it all started going downhill.


Johann Gevers holding up his hand
Johann Gevers

As Swiss Foundations have no rigid ownership structure, whoever controls the board of the foundation controls the foundation itself. As such, all of the money raised by Tezos was now in control of Mr. Gevers and the other two board members: Diego Pons and Guido Schmitz-Krummacher.

It did not take long before the Breitman couple and Gevers had a fall-out, which became painfully public through a publication by Reuters.

Apparently, the Breitmans had sent a 46-page letter to the Foundation’s two other board members, calling for Gevers’ prompt removal and seeking to give the couple a “substantial role” in a new structure that would limit the foundation’s responsibilities. In the letter, the Breitmans accused Gevers of self-dealing, self-promotion and conflicts of interest.

The couple moreover claims that Gevers tried to pressure the other two foundation members, into a bonus worth $1.5 million, but “misrepresented this as being worth only $300,000.” In a post on Medium, called ‘The way further’, they repeated their allegation towards Johann Gevers and said that they “had been working with the Tezos foundation to resolve the matter and have advocated for his removal from the foundation council.”

Gevers denied all allegations in a reaction to Finews and in turn responded by saying:

“this is attempted character assassination. It’s a long laundry list of misleading statements and outright lies. […] The other two board members are attempting an illegal coup.”

It is difficult to get a full recount of everything that happened, as a number of public statements have since been deleted. I imagine it the situation was never black-and-white to begin with. One thing is clear though: there is a certain irony in how Tezos, the cryptocurrency aiming to solve governance issues on the blockchain, crashed due to governance issues.

Class actions

Of course, a public mud-slinging contest is the last thing you want to do if you have just raised $250 million USD without complying with securities legislation.

As a result of all this drama, the launch of the Tezos network was significantly delayed and ‘Tezzie’ futures lost over 50% of their value. It has been 11 months since Tezos promised to launch within “2–4 months”.

Meanwhile, Tezos’ investors (or ‘donators’, as Tezos likes to call them) have still not received their tokens.

This is stuff that is bound to attract legal action and, indeed, angry investors have filed four class action lawsuits against Dynamic Ledger Solutions, Inc., the Breitmans and the Tezos Foundation. [see Case Nos. 3:17-cv-6779-RS; 3:17-cv-6829-RS; 3:17-cv-6850-RS (all in the Northern District of California) and Case №6:17-cv-1959-ORL-40-KRS (in the Middle District of Florida)]


school of fish power of the masses tezos
Class actions against Tezos.
The general complaints are:
  • Selling unregistered securities
  • Misrepresentation of how the funds would be spent
  • Misrepresentations of when the network would be active
  • accusations in terms of false advertising under state laws, unfair competition and deceptive trade practices

The first issue, the selling of unregistered secuities, is the most important aspect of each case. During the ICO, Tezos called the contributions “a non-refundable donation” and not a speculative investment. However, as is the case for nearly all ICO’s, I believe Tezos will tick the boxes of the Howey-testand be deemed a security (investment contract).

Long story short, there is little chance the Breitmans come out of this unscathed , as the sale of unregistered securities is a serious financial offense. Investors could demand their money back, plus damages and appreciation of their invested Bitcoins. Moreover, the sale of unregistered securities without an exemption is also a federal and state crime.

Stephen Palley, an attorney in the blockchain-space, detailing a section from the compiled class action compliant, filed April 4th.

The nuclear option

Brian Klein, the Breitmans’ attorney said that the lawsuit “is without merit” and that the couple is “going to aggressively defend themselves”.

Still, the best course of action for the Breitmans is to make sure that the networks launches successfully and the tokens are distributed before any of the lawsuits make it to court, in hope of investors dismissing their lawsuits.

Indeed, they have shown to do whatever it takes to make sure the network would launch. To make an end to the public battle with Gevers, they threatened with a nuclear option: they founded a second Foundation.

The Breitmans were prepared to to launch the Tezos network themselves anyway (in violation of their contract with the first Foundation) — and give the tokens that would vest over 4 years to the Second Foundation. This way, they would have enough funds to get the network up and running, while Gevers’ Foundation would continue sitting on half a Billion USD which it can only spend on furthering the development of the network.

After half a year of (very public) back and forth between the Breitmans and the Foundation, the nuclear option in play and the Tezos community siding with the Breitmans, Gevers finally “voluntarily” stepped down in february. At last, the Foundation’s board was restructured.

The way forward

To this day, the class action lawsuits are still hanging over the Breitmans’ heads. The question also remains who is going to pay for their legal defense.

After all, Swiss law states that foundations can only operate to fulfill its mission, it might just be illegal for the Foundation to pay for the legal defenseof the Breitmans — no matter who controls the board. Is paying for the defense of the Breitmans in line with the Foundation’s aim ‘to foster the development of the Tezos protocol, to support the creation of applications leveraging Tezos, and to promote the broader goals of the project’?

The whole Tezos drama started with the choice to incorporate a Swiss Foundation for its ICO. Even Luka Mueller of MME, the law firm that started the trend of the ICO structure using Swiss Foundations, now admits that:

”“The Swiss foundation actually is a very old, inflexible, stupid model (…) it is not designed for operations.”

For the sake of the future of distributed ledger technologies, I sure hope that the case of Tezos will be taken as a case study of how not to do an ICO.

As for Tezos, the network and token will launch in Q3 this year, according to a roadmap the Foundation released two days ago. Personally, I am more curious as to how the lawsuits unfold.

Thijs Maas is a Dutch LLM student who developed a keen interest in the interplay between distributed ledger technologies and law. He started to help narrow the increasing gap between legal doctrine and regulatory challenges posed by blockchain-based asset classes.

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