Page 5 of 40 GENERAL ALLEGATIONS A. Background 12. Defendants claim that Token is a cryptocurrency, which unlike fiat currency, is created, distributed, traded, and stored with the use of a decentralized ledger system known as a blockchain. 13. Token has all of the characteristics of a security, and more specifically an investment contract, as defined under the Securities Act and by the United States Supreme Court in SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (“Howey”). 14. In Howey, the Court developed what is known as the “Howey Test” to evaluate whether certain transactions qualify as “investment contracts” under the Securities Act. Under the Howey Test, a transaction is an investment contract if: (1) it is an investment of money; (2) there is an expectation of profits from the investment; (3) the investment of money is in a common enterprise; and (4) any profit comes from the efforts of a promoter or third party. 15. The first prong of the Howey Test is typically satisfied in an offer and sale of a cryptocurrency because the cryptocurrency is purchased or otherwise acquired in exchange for value, whether in the form of currency or other consideration. Plaintiffs in this matter engaged in a transaction with Defendants by which Plaintiffs delivered or caused to be delivered to Defendant KJ for Defendant Latinum the sum of $541,045 in U.S. currency in exchange for Tokens. Case 2:22-cv-10208-RHC-JJCG ECF No. 1, PageID.5 Filed 02/01/22 Page 5 of 40
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