The Novel Legal Strategy Bringing This ICO-Backed ‘Micro-Mobility’ Startup to Court

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Daniel Kuhn The Novel Legal Strategy Bringing This ICO-Backed ‘Micro-Mobility’ Startup to Court Salvatore Palella is often credited as the man who brought electric scooters to Italy. Less known is his attempt to bring ride-sharing to the blockchain. In June 2019, Italian Minister of Transportation Danilo Toninelli granted a decree to allow micro-mobility businesses to operate in cities that decided to participate in an e-scooter trial, at Palella’s urging. That’s the story the serial entrepreneur tells of his startup Helbiz, the “first sharing electric scooter company” in the country. Or at least, the first one partially funded by cryptocurrency. With a fleet of 8,000 scooters in Italy alone, and offices reportedly in New York, Milan, Madrid, Belgrade and Singapore, Helbiz is well-positioned in a buoyant industry. In June 2019, the company announced plans for an initial public offering (IPO) through a dual listing on Nasdaq and AIM Italia, an exchange dedicated to small, high-growth firms. It would be a notable exit in an industry that exploded in popularity in 2017 but has yet to find long-term profitability . Instead of cheering, however, Helbiz’s early investors have filed a lawsuit. In a complaint seeking class action status, filed June 18 in the United States District Court for the Southern District of New York, 20,000 investors claim Palella, Helbiz and several co-conspirators are liable for breach of contract regarding the startup’s fundraising model. ICO boom On the urban and suburban sidewalks, e-scooters have been a highly contested battleground for venture capitalists . Market leaders Lime and Bird rode the everything-is-tech-if-it’s-an-app wave to unicorn status . But Helbiz, founded in 2015, took a different route: an initial coin offering (ICO). In 2017, in the midst of the ICO boom, Palella began promoting HelbizCoin (HBZ) and its associated blockchain platform as a peer-to-peer solution to reinvent the ride-sharing economy. Capitalizing on the mania over crowd-sharing businesses and crypto, Palella raised nearly $40 million from small investors , he said at the time . Unlike other ICO projects that have been brought to court – usually over securities law violations – plaintiffs behind the class action are accusing Palella, Helbiz, et al. of breaking their promise to use this utility token as advertised. Source: Helbiz “When they sold this token, they made promises about how it would be used on the platform. They took the money and broke the promises. That kind of misconduct is at least a breach of contract and could very well amount to fraud,” said Michael Kanovitz, a civil rights attorney of the litigating firm Loevy & Loevy. Kanovitz’s argument focuses on promises Palella allegedly made to investors before, during and after the token sale regarding the use of HelbizCoin on its software platform. According to the complaint, Helbiz planned to use the capital raised from its ICO to build a “smartphone-based vehicle rental platform” – at that time envisioned to expand from scooters to cars to seaplanes, which would function entirely on HBZ. “At no point did the white paper disclose any intent to allow rentals on the Helbiz platform in any currency other than HelbizCoin,” the complaint claims. Though the project’s original white paper did say the “choice to create a native token for Helbiz transactions is not casual… [T]he conclusion of our careful analysis was that only a native token allows Helbiz to optimize for the [company’s] objectives,” the plaintiffs note. Helbiz responded with a written statement saying the “lawsuit filed last week against Helbiz Inc., Salvatore Palella and others is baseless and the claims, including the breach of contract claim, are without merit.” Legal gambit The case “is highly unusual,” said Jason Gottlieb, a partner at Morrison Cohen. Gottlieb maintains a database of cryptocurrency lawsuits and found the vast majority of token projects are brought to court under securities violations. It’s a pattern of litigation other skilled observers have noticed. “Typically, they just get sued for securities fraud or regular old fraud,” said Nic Carter, a partner at Castle Island Ventures and frequent contributor to CoinDesk . “Even though the substance of the complaint hints at fraud, the plaintiffs notably decided not to include any fraud claims, under the securities laws or otherwise,” Jake Chervinsky, general counsel at DeFi startup Compound, said. Offering an explanation for the novel legal strategy, he said that securities claims might be “time-barred,” or past the statute of limitations, which in this case is one year. According to Chervinsky, many ICOs were conducted under SAFT, or “ simple agreement for future tokens ,” guidance, an investment contract that complies with securities regulations. It usually provides disclaimers of liability and mandatory arbitration clauses, essentially nullifying a potential “breach of contract claim.” Helbiz wasn’t issued under SAFT...