SEC v. Payward, Inc. et al. (Kraken), Complaint (unregistered exchange/broker/dealer/clearing agency; commingling allegations ¶¶ 2, 210-221), No. 3:23-cv-06003 (N.D. Cal.), Dkt. 1 (Part 1 of 2)

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Research, not advice. Part of the Bitcoin research archive (October 2026). Claims labelled unverified, contested or fringe are reported, not endorsed; statuses of bills and rules are as of the date checked. Government, court and patent records are public domain; the research notes are CC BY 4.0.

Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 1 of 90

 1   DANIEL BLAU (Cal. Bar No. 305008)
     Email: [email protected]
 2   ALEC JOHNSON (Cal. Bar No. 270960)
     Email: [email protected]
 3   PETER MOORES (Mass. Bar No. 658033)
     Email: [email protected]
 4   ELIZABETH GOODY (N.Y. Bar No. 4687463)
     Email: [email protected]
 5
     Attorneys for Plaintiff
 6   Securities and Exchange Commission
 7   David Hirsch, Chief (Crypto Assets and Cyber Unit)
     Jorge Tenreiro, Deputy Chief (Crypto Assets and Cyber Unit)
 8   100 F Street NE
     Washington, DC 20549
 9
     Kathryn E. Zoladz, Acting Regional Director
10   Douglas M. Miller, Regional Trial Counsel
     444 S. Flower Street, Suite 900
11   Los Angeles, California 90071
     Telephone: (323) 965-3998
12   Facsimile: (213) 443-1904
13                       UNITED STATES DISTRICT COURT
                       NORTHERN DISTRICT OF CALIFORNIA
14
                                SAN FRANCISCO DIVISION
15
16
17    SECURITIES AND EXCHANGE                      Case No.
      COMMISSION,
18                                                 COMPLAINT
                   Plaintiff,
19
             vs.
20
      PAYWARD, INC. and PAYWARD
21    VENTURES, INC.,
22                 Defendants.
23
24
25         In support of its Complaint against Defendants Payward, Inc. (“Payward”) and
26   Payward Ventures, Inc. (“Payward Ventures”), which collectively do business as
27   “Kraken,” Plaintiff Securities and Exchange Commission (“SEC” or the
28   “Commission”) alleges as follows:
      COMPLAINT                                    1
                Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 2 of 90

 1   I.    SUMMARY
 2         1.     Since 2013, Kraken has operated an online trading platform through
 3   which its customers can buy and sell crypto assets, many of which form the basis of
 4   investment contracts covered under U.S. securities laws. Without registering with the
 5   SEC in any capacity, Kraken has simultaneously acted as a broker, dealer, exchange,
 6   and clearing agency with respect to these crypto asset securities. In doing so, Kraken
 7   has created risk for investors and taken in billions of dollars in fees and trading
 8   revenue from investors without adhering to or even recognizing the requirements of
 9   the U.S. securities laws that are designed to protect investors.
10         2.     Kraken’s business practices, deficient internal controls, and inadequate
11   recordkeeping present a range of additional risks that would also be prohibited for
12   any properly registered securities intermediary. For example, Kraken has at times
13   held customer crypto assets valued at more than $33 billion, but it has commingled
14   these crypto assets with its own, creating what its independent auditor had identified
15   in its audit plan as “a significant risk of loss” to its customers. Similarly, Kraken has
16   held at times more than $5 billion worth of its customers’ cash, and it also
17   commingles some of its customers’ cash with some of its own. In fact, Kraken has at
18   times paid operational expenses directly from bank accounts that hold customer cash.
19   In addition, during 2023, the independent auditor determined that issues related to
20   Kraken’s recordkeeping for customer custodial assets had resulted in material errors
21   to Kraken’s financial statements for 2020 and 2021.
22         3.     Congress enacted the Securities Exchange Act of 1934 (the “Exchange
23   Act”) in part to provide for the regulation of the national securities markets.
24   Congress charged the SEC with protecting investors, preserving fair and orderly
25   markets, and facilitating capital formation. The SEC carries out these statutorily
26   mandated goals in part through a series of registration, disclosure, recordkeeping,
27   inspection, and anti-conflict-of-interest regulations. These regulations have generally
28   led to the separation of key intermediaries in the securities markets⸺including the
       COMPLAINT                                    2
                 Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 3 of 90

 1   separation of brokers and dealers from exchanges and clearing agencies⸺thereby
 2   protecting investors and their assets from the conflicts of interest and risks that can
 3   arise when these functions merge. The SEC has also taken steps to protect investor
 4   assets when held by brokers or clearing agencies, including by issuing regulations
 5   that restrict the commingling of customer assets with those of the companies handling
 6   their investments.
 7          4.     By operating a platform on which crypto assets are offered and sold as
 8   investment contracts, Kraken’s operations place it squarely within the purview of
 9   U.S. securities laws. Over seventy years ago, the Supreme Court in SEC v. W.J.
10   Howey Co., 328 U.S. 293 (1946), set forth the relevant test for determining whether
11   an instrument is an investment contract subject to regulation under U.S. securities
12   laws. And in July 2017, the Commission issued a public report reminding members
13   of the public that crypto assets may be considered investment contracts subject to
14   securities laws if they satisfy Howey’s test. The SEC has also enforced the relevant
15   securities laws by bringing a range of enforcement actions based on the offer and sale
16   of crypto assets as securities. Nonetheless, Kraken has turned a blind eye to its legal
17   responsibilities and engaged in its securities intermediary conduct without registering
18   with the Commission, depriving investors of the disclosures and protections that
19   registration entails.
20          5.      In failing to prevent known conflicts of interest and commingling its
21   investors’ assets with its own, Kraken demonstrates why registration and the investor
22   protections that come with regulatory oversight are critical to the soundness of the
23   United States capital markets. Defendants have placed their own financial interests
24   ahead of the legal obligations they owe to customers as securities intermediaries. By
25   engaging in the conduct set forth in this Complaint, Defendants have acted as an
26   exchange, a broker, a dealer, and a clearing agency without registration in violation of
27   Exchange Act Sections 5, 15(a), and 17A(b) [15 U.S.C. §§ 78e, 78o(a), and 78q-
28   1(b)]. Unless Defendants are permanently restrained and enjoined, they will continue
       COMPLAINT                                3
                  Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 4 of 90

 1   to violate these statutes.
 2          6.     The Commission brings this action pursuant to the authority conferred
 3   upon it by Exchange Act Section 21(d) [15 U.S.C. § 78u(d)].
 4          7.     The Commission seeks a final judgment: (i) permanently enjoining
 5   Defendants from violating Sections 5, 15(a), and 17A of the Exchange Act [15 U.S.C.
 6   §§ 78e, 78o(a), and 78q-1(b)(1)]; (ii) ordering Defendants to disgorge their ill-gotten
 7   gains, on a joint and several basis, and to pay prejudgment interest thereon; (iii)
 8   permanently enjoining Defendants from acting as an unregistered exchange, broker,
 9   dealer, or clearing agency; and (iv) imposing civil money penalties on Defendants.
10   II.    JURISDICTION AND VENUE
11          8.     The Court has jurisdiction over this action pursuant to Section 21(d) of
12   the Exchange Act, 15 U.S.C. § 78u(d).
13          9.     Defendants, directly or indirectly, have made use of the means or
14   instrumentalities of interstate commerce, of the mails, or of the facilities of an
15   exchange within or subject to the jurisdiction of the United States in connection with
16   the transactions, acts, practices, and courses of business alleged in this Complaint.
17          10.    Venue is proper in this district pursuant to Section 27(a) of the Exchange
18   Act, 15 U.S.C. § 78aa(a), because certain of the transactions, acts, practices, and
19   courses of conduct constituting violations of the federal securities laws occurred
20   within this district. In addition, venue is proper because Defendants are
21   headquartered in this district.
22   III.   DIVISIONAL ASSIGNMENT
23          11.    Under Civil Local Rule 3-2(d), this case should be assigned to the San
24   Francisco Division or the Oakland Division because a substantial part of the events or
25   omissions that give rise to the claims alleged herein occurred in San Francisco
26   County.
27   IV.    DEFENDANTS
28          12.Payward is a Delaware corporation founded in 2011, with an address in
       COMPLAINT                              4
                 Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 5 of 90

 1   San Francisco, CA. Payward has a number of wholly owned subsidiaries
 2   headquartered throughout the world, including Payward Ventures, Inc. Payward and
 3   most of its subsidiaries do business as Kraken. Payward has never registered with the
 4   Commission in any capacity.
 5         13.    Payward Ventures is a Delaware corporation founded in 2013, with an
 6   address in San Francisco, CA. Payward Ventures has never registered with the
 7   Commission in any capacity. On February 9, 2023, the SEC filed a settled action
 8   against Payward Ventures in connection with the unregistered offer and sale of
 9   Kraken’s staking-as-a-service program. See SEC v. Payward Ventures, Inc., No.
10   3:23-cv-588 (N.D. Cal.).
11   V.    BACKGROUND
12         14.    Kraken is subject to the laws and regulations governing the U.S.
13   securities markets because many of the crypto assets bought and sold through its
14   platform are offered, bought, and sold as investment contracts. As discussed below,
15   investment contracts are defined broadly under the law with a focus on an investor’s
16   reasonable expectations in acquiring an asset, rather than the form of the transaction
17   itself. Moreover, Kraken has long been on notice that its role in the offer and sale of
18   crypto assets as investment contracts made it subject to U.S. securities laws.
19         A.     Statutory and Legal Framework Regarding the Scope of U.S.
20                Securities Regulations
21         15.    As the Supreme Court has recently reemphasized, the Exchange Act and
22   the Securities Act of 1933 (“Securities Act”) “form the backbone of American
23   securities laws.” Slack Tech., LLC v. Pirani, 598 U.S. 759, 762 (2023). Together,
24   these acts provide for the regulation of various entities involved in the purchase and
25   sale of securities and define “security” broadly to include a wide range of assets,
26   including “investment contracts.” Securities Act § 2(a)(1) [15 U.S.C. § 77b(a)(1)];
27   Exchange Act § 3(a)(10) [15 U.S.C. § 78c(a)(10)].
28         16. Investment contracts are instruments through which a person invests
       COMPLAINT                               5
                 Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 6 of 90

 1   money in a common enterprise and reasonably expects profits or returns derived from
 2   the entrepreneurial or managerial efforts of others. As the United States Supreme
 3   Court noted in Howey, Congress defined “security” broadly to embody a “flexible
 4   rather than a static principle, one that is capable of adaptation to meet the countless
 5   and variable schemes devised by those who seek the use of the money of others on
 6   the promise of profits.” 328 U.S. at 299. Following Congress’s intent, courts have
 7   found novel or unique investment vehicles to be investment contracts, including those
 8   involving orange groves, animal breeding programs, cattle embryos, mobile phones,
 9   enterprises that exist only on the internet, and crypto assets.
10         17.    To protect investors and fulfill the purposes of the Exchange Act,
11   Congress imposed registration and disclosure obligations on certain defined
12   participants in the national securities markets, including but not limited to broker-
13   dealers, exchanges, and clearing agencies. The Exchange Act empowers the SEC to
14   write rules to, among other things, protect investors who use the services of those
15   participants and provide for stability of the nation’s securities markets.
16         B.     Crypto Assets and Crypto Trading Platforms
17                1.     Crypto Assets
18         18.    As used herein, the terms “crypto asset,” “digital asset,” or “token”
19   generally refer to an asset issued and/or transferred using blockchain or distributed
20   ledger technology, including assets referred to colloquially as “cryptocurrencies,”
21   “virtual currencies,” and digital “coins.”
22         19.    A blockchain or distributed ledger is a database spread across a network
23   of computers that records transactions in theoretically unchangeable, digitally
24   recorded data packages, referred to as “blocks.” These systems typically rely on
25   cryptographic techniques to secure recording of transactions.
26         20.    Some crypto assets are “native” to a particular blockchain, meaning that
27   they are the blockchain’s core asset that is integral to how the blockchain functions.
28   In contrast, other crypto assets may be non-native and are built on top of an existing
       COMPLAINT                                  6
                 Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 7 of 90

 1   blockchain.
 2         21.     Some crypto assets may provide a holder with certain pre-determined
 3   rights, coded into the software itself, such as the right to “burn” (or destroy) the asset
 4   in order to propose transactions on the asset’s blockchain, or to interact with other
 5   portions of the blockchain’s existing or yet-to-be-developed protocols and software.
 6         22.     Crypto asset owners typically store key information about their crypto
 7   assets on a piece of hardware or software called a “crypto wallet.” The primary
 8   purpose of a crypto wallet is to store the “public key” and the “private key”
 9   associated with a crypto asset so that the user can make transactions on the associated
10   blockchain. The public key is colloquially known as the user’s blockchain “address”
11   and can be freely shared with others. The private key is analogous to a password and
12   confers the ability to transfer a crypto asset. Therefore, whoever controls the private
13   key controls the crypto asset associated with that key. Crypto wallets can reside on
14   devices that are connected to the internet (sometimes called “hot wallets”), or on
15   devices that are not connected to the internet (sometimes called “cold wallets” or
16   “cold storage”). Although, all wallets are at risk of being compromised or “hacked,”
17   hot wallets are at greater risk because their internet connectivity makes them easier to
18   access remotely.
19         23.     Crypto assets can be transferred directly on the relevant blockchain or
20   through a third-party intermediary. The transfer of a crypto asset from one person to
21   another that is verified and recorded on the relevant blockchain’s publicly-available
22   ledger is known as an “on-chain” transaction. The reliability of on-chain crypto asset
23   transfers is one of the core functionalities of blockchain technology, as described in
24   Section B.2 below.
25         24.     Crypto asset transactions that occur without being submitted to, verified,
26   or recorded on a blockchain are known as “off-chain” transactions. For example, the
27   transfer of crypto assets between two customers on the same centralized trading
28   platform, such as Kraken’s, is an off-chain transaction.
       COMPLAINT                                    7
                 Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 8 of 90

 1                2.        Consensus Mechanisms and Validation of Transactions on a
 2                          Blockchain
 3         25.    Blockchains typically employ a “consensus mechanism” that, among
 4   other things, aims to achieve agreement among users as to a data value or as to the
 5   state of the ledger.
 6         26.    A consensus mechanism describes the particular protocol used by a
 7   blockchain to agree on, among other things, which ledger transactions are valid, when
 8   and how to update the blockchain, and whether to compensate certain participants for
 9   validating transactions and adding new blocks. There can be multiple compensation
10   sources for consensus mechanisms under the terms of the blockchain protocol,
11   including from fees charged to those transacting on the blockchain, or through the
12   creation or “mining” of additional amounts of the blockchain’s native crypto asset.
13         27.    “Proof of work” and “proof of stake” are two of the most prevalent
14   consensus mechanisms used by blockchains. Proof of work, the mechanism used by
15   the Bitcoin blockchain, involves a network of computers, known as “miners,”
16   expending computational effort to guess the value of a predetermined number. The
17   first miner to successfully guess this number earns the right to update the blockchain
18   with a block of transactions and is rewarded with the blockchain’s native crypto asset.
19   Proof of stake, the consensus mechanism currently used on the Ethereum blockchain,
20   involves selecting “validators” from a network of crypto asset holders who have
21   committed or “staked” a minimum number of crypto assets.
22                3.        The Offer and Sale of Crypto Assets
23         28.    Persons have offered and sold crypto assets in capital-raising events in
24   exchange for consideration, including but not limited to through so-called “initial
25   coin offerings” or “ICOs,” “crowdsales,” or public “token sales.” In some instances,
26   the entities offering or selling the crypto assets may release a “whitepaper” or other
27   marketing materials describing a project to which the asset relates, the terms of the
28   offering, and any rights associated with the asset.
       COMPLAINT                                    8
                 Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 9 of 90

 1         29.       Some issuers continue to sell the crypto assets after the initial offer and
 2   sale, including directly or indirectly by selling them on crypto asset trading platforms.
 3                   4.    Crypto Asset Trading Platforms
 4         30.       Crypto asset trading platforms—like Kraken’s—are marketplaces that
 5   offer a variety of services relating to crypto assets, often including brokerage, trading,
 6   custody, and settlement services.
 7         31.       Crypto asset trading platform interfaces—like Kraken’s—also look
 8   similar to traditional custodial securities brokerage platforms. Whether web-,
 9   desktop-, or mobile-based, application programming interfaces (APIs), or other
10   software, these crypto asset trading platform interfaces typically emulate those
11   offered within the traditional securities markets: they show order books of the various
12   assets available to trade and historical trading information like high and low prices,
13   trading volumes, and capitalizations which serve in part to help investors recognize
14   market opportunities.
15         32.       Crypto asset trading platforms allow their customers to deposit fiat (legal
16   tender issued by a country) into bank accounts and crypto assets into crypto wallets
17   controlled by the platform, and then to purchase and sell crypto assets for fiat or other
18   crypto assets. These transactions can be finalized on-chain, with the intermediary
19   transferring the purchased crypto asset from the seller’s account to the buyer’s crypto
20   wallet. Or, if the purchaser has an account with the intermediary and customer assets
21   are stored collectively in what is called an omnibus wallet, then the transactions can
22   be finalized off-chain, with the platform recording the necessary debits and credits
23   internally, without having to transfer crypto assets from one blockchain address to
24   another.
25         33.       By possessing and controlling the fiat and crypto assets deposited and/or
26   traded by their customers, crypto asset trading platforms function as central
27   depositories.
28         34. However, unlike in traditional securities markets, crypto asset trading
       COMPLAINT                                9
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 1   platforms (including that of Kraken) perform various other functions, in that they also
 2   typically solicit, accept, and handle customer orders for securities; allow for the
 3   interaction and intermediation of multiple bids and offers resulting in purchases and
 4   sales; act as an intermediary in making payments or deliveries, or both; and maintain
 5   a central securities depository for the settlement of securities transactions.
 6         35.     By contrast, a registered national securities exchange submits
 7   information regarding executed trades to a registered clearing agency that takes
 8   responsibility for ensuring settlement finality and safekeeping of the assets being
 9   traded and, in doing so, protects investors’ interests. Thus, registered national
10   securities exchanges typically do not assume possession or control of the underlying
11   assets being traded. Moreover, crypto asset trading platforms usually settle
12   transactions by updating internal records with each investor’s positions, a function
13   typically carried out by clearing agencies and broker-dealers in compliant securities
14   markets.
15         36.     Likewise, crypto asset trading platforms typically perform roles
16   traditionally assigned to broker-dealers in compliant securities markets, such as
17   effecting securities transactions on behalf of their customers, without the platforms
18   following or even acknowledging the legal obligations and restrictions on activities
19   that accompany status as a broker-dealer.
20         C.      The SEC’s “DAO Report”
21         37.     On July 25, 2017, the SEC issued the Report of Investigation Pursuant to
22   Section 21(a) of the Securities Exchange Act of 1934: The DAO (the “DAO
23   Report”), advising “those who would use … distributed ledger or blockchain-enabled
24   means for capital raising[] to take appropriate steps to ensure compliance with the
25   U.S. federal securities laws,” and finding that the offering of crypto assets at issue in
26   the DAO Report were offerings of securities.
27         38.     The DAO Report also advised that “any entity or person engaging in the
28   activities of an exchange must register as a national securities exchange or operate
       COMPLAINT                                   10
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 1   pursuant to an exemption from such registration,” and “stress[ed] the obligation to
 2   comply with the registration provisions of the federal securities laws with respect to
 3   products and platforms involving emerging technologies and new investor
 4   interfaces.” The DAO Report also found that the trading platforms at issue there
 5   “provided users with an electronic system that matched orders from multiple parties
 6   to buy and sell [the crypto asset securities at issue] for execution based on non-
 7   discretionary methods” and therefore “appear to have satisfied the criteria” for being
 8   an exchange under the Exchange Act.
 9   VI.   FACTUAL ALLEGATIONS
10         A.      Kraken’s Operations
11         39.     In 2013, Kraken launched its “Kraken Trading Platform,” which allows
12   customers to buy and sell crypto assets through an online market. On its website,
13   Kraken describes the Kraken Trading Platform as “one of the world’s largest digital
14   asset exchanges” and advertises that it has more than nine million retail and
15   institutional customers located in over 190 countries.
16         40.     With the launch of the Kraken Trading Platform, Kraken also began
17   providing services for customers to open accounts, deposit funds, enter orders, and
18   trade crypto assets (“Kraken Services”).
19         41.     Today, Kraken’s Trading Platform resembles those found in the
20   traditional securities industry with a matching engine, customer interface
21   applications, a range of order types, and advanced trading tools. From its start in
22   2013 to the present (the “Relevant Period”), the Kraken Trading Platform and Kraken
23   Services have evolved into an expansive online trading operation that lists more than
24   220 crypto assets and permits margin trading while offering securities trading
25   services such as an over-the-counter trading desk (“OTC Desk”), “instant buy”
26   features, and multiple applications and pathways for customers to interface with the
27   Kraken Trading Platform and Kraken Services.
28         42. Through the Kraken Trading Platform and Kraken Services, Kraken
       COMPLAINT                            11
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 1   facilitates transactions in crypto assets in multiple ways. This includes: (1) allowing
 2   customers to submit orders for crypto assets and operating a system that attempts to
 3   match those orders; (2) opening and maintaining customer accounts and holding
 4   funds and crypto assets that have been transferred to or purchased through Kraken by
 5   customers; (3) operating “Instant Buy,” where Kraken acts as the counterparty for a
 6   customer’s request to buy or sell crypto assets; (4) operating the OTC Desk, which
 7   facilitates large crypto asset orders; (5) operating applications that allow customers to
 8   access their accounts and place and direct orders; and (6) offering margin lending for
 9   trading in crypto assets on the Kraken Trading Platform.
10         43.     In 2020 and 2021 together, Kraken earned more than $43 billion in
11   revenue from trading-based transactions, including from fees charged to customers,
12   sales of crypto assets to customers, and proprietary trading.
13         44.     The Kraken Trading Platform and Kraken Services are available to both
14   retail and institutional customers, including to customers inside and outside the
15   United States.
16         45.     The Kraken Trading Platform’s servers are located in the United States,
17   and are the means through which the platform operates a single set of order books
18   and a matching engine. Kraken does not segregate or segment the order books based
19   on geography or local operating entity.
20         46.     Payward utilizes a single set of Terms of Service to cover the Kraken
21   Trading Platform and Kraken Services. According to Kraken’s Terms of Service, the
22   Kraken Trading Platform and Kraken Services are offered through “local operating
23   entities,” which are wholly owned subsidiaries of Payward. For customers residing in
24   the United States, the local operating entity is Payward Ventures.
25         47.     Despite the geographic designations referenced in the Terms of Service,
26   Payward’s operations are not geographically segregated, allowing U.S. customers to
27   trade crypto assets regardless of where Kraken’s operations occur. Personnel of
28   various local operating entities are cross-staffed according to product or service (not
       COMPLAINT                                    12
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 1   by region) and report to Payward executive management. For example, personnel of
 2   the Kraken Trading Platform and OTC Desk ultimately report to Payward’s chief
 3   operating officer. Payward’s current and former chief executive officers participated
 4   in promotional videos and media interviews promoting the Kraken Trading Platform.
 5   Moreover, Payward’s marketing materials to venture capital investors do not
 6   differentiate between Payward and these local operating entities.
 7         48.     The crypto assets made available for trading on the Kraken Trading
 8   Platform and through the Kraken Services may be bought, sold, or exchanged for
 9   consideration, including U.S. dollars, other fiat currencies, or other crypto assets.
10         49.     Each unit of a particular crypto asset on the Kraken Trading Platform
11   trades at the same price as another unit of that same crypto asset.
12         50.     These crypto assets are interchangeable (e.g., any “FIL” crypto asset or
13   fraction thereof is just like any other FIL crypto asset) on the Kraken Trading
14   Platform. Accordingly, to the extent the assets change in price on the Kraken Trading
15   Platform, all tokens of the same asset increase or decrease in price in the same
16   amounts and to the same extent, such that one token is equal in value to any other one
17   token, on a pro rata basis.
18         51.     However, investors may buy or sell crypto assets through the Kraken
19   Services at prices different than the contemporaneous price on the Kraken Trading
20   Platform. For example, Kraken may sell to an investor a crypto asset through its
21   Instant Buy feature at a different price then the last executed trade or current offer on
22   the Kraken Trading Platform.
23         52.     Nevertheless, the purchase of any particular unit of a crypto asset does
24   not appear to give an investor any special rights not available to any other investor in
25   that crypto asset, such as separately managed accounts, or different capital
26   appreciation as to the value of that crypto asset. This includes assets purchased on
27   the Kraken Trading Platform and assets purchased through the Instant Buy feature.
28         53. The crypto assets on the Kraken Trading Platform are available for sale
       COMPLAINT                              13
                 Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 14 of 90

 1   broadly to any person who creates an account with Kraken. Kraken applications
 2   display information (like asset price changes) in a format highly similar to trading
 3   applications offered by registered broker-dealers in the traditional securities markets.
 4   Kraken makes these crypto assets available for trading without restricting transactions
 5   to those who might acquire or treat the asset as something other than as an
 6   investment.
 7         54.     Kraken customers can access asset-specific webpages from the “Crypto
 8   Prices” page on Kraken’s website. There, customers can click on the name of a
 9   particular crypto asset and are redirected to a page where Kraken provides additional
10   information about that crypto asset. The information on each asset-specific page
11   includes: (i) an “about” section describing the crypto asset; (ii) a “who created”
12   section describing the team of people who created or launched the crypto asset and
13   are developing the network for the crypto asset; (iii) a “how does it work” section that
14   describes the protocol and blockchain for the crypto asset and any parameters or
15   characteristics of the crypto asset; (iv) a roadmap section describing the anticipated
16   development of the crypto network or project; (v) a section describing various
17   analysts assessments about the future price of the crypto asset; (vi) historical
18   information about the “price” of the asset including its “all-time high” price during
19   the past year and the “price change” over the last 24 hours and the last year stated as a
20   percentage return change; (vii) a link to another page about the crypto asset to “learn
21   more about” it; (viii) links to purchase the crypto asset on the Kraken Trading
22   Platform or through the Kraken Services and a description of the other crypto assets
23   owned by owners of the particular crypto asset, and (ix) information specifically
24   promoting a purchase of the asset as an investment into the asset’s promoter’s efforts
25   to develop, create, grow, and/or maintain the asset's ecosystem in the hope that this
26   will increase the asset’s value.
27         55.     Because Kraken has not registered as a broker, dealer, national securities
28   exchange, or clearing agency, there is no formal mechanism to ensure the accuracy or
       COMPLAINT                                  14
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 1   consistency of the information Kraken selectively discloses about the crypto assets it
 2   makes available for trading or about its own operations.
 3         56.     Kraken does not restrict how many units of a crypto asset any given
 4   investor may purchase. Moreover, investors are not required to purchase quantities
 5   tied to a purported non-investment “use” that may exist for the asset, if any. To the
 6   contrary, investors may purchase crypto assets in any amount and for any purpose.
 7         57.     The crypto assets made available for trading on the Kraken Trading
 8   Platform and through the Kraken Services are transferable and immediately eligible
 9   for resale on the Kraken Trading Platform and through the Kraken Services (both
10   subject to settlement) without any apparent restrictions on resale (including as to the
11   prices or amounts of resale, or the identity of the new buyers).
12         B.      Many of the Crypto Assets Available Through Kraken Are
13                 Securities
14         58.     Throughout the Relevant Period, Kraken has made available for trading
15   many “crypto assets securities.” These crypto asset securities are investment
16   contracts represented by the underlying crypto asset. In fact, Kraken currently makes
17   available for trading crypto assets that have been the subject of prior SEC
18   enforcement actions based upon their status as crypto asset securities, including
19   crypto assets trading under the symbols ADA, AXS, ALGO, ATOM, CHZ, COTI,
20   DASH, FIL, FLOW, ICP, MANA, MATIC, NEAR, OMG, SAND, and SOL, which
21   were alleged in one or more of the following actions against other unregistered
22   intermediaries: SEC v. Bittrex, No. 2:23-cv-580 (W.D. Wash. filed April 17, 2023);
23   SEC v. Binance Holdings Ltd., Civ. No. 23-1599 (D.D.C. filed June 5, 2023); SEC v.
24   Coinbase, Inc., No. 23-cv-4738 (S.D.N.Y. filed June 6, 2023).
25         59.     For purposes of prevailing on the Exchange Act claims set forth herein,
26   the SEC need only establish that Kraken has engaged in regulated activities relating
27   to a single crypto asset security during the Relevant Period. Nevertheless, set forth
28   herein are details regarding a non-exhaustive list of 11 crypto asset securities
       COMPLAINT                                  15
                 Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 16 of 90

 1   available on the Kraken Trading Platform and through the Kraken Services under the
 2   following trading symbols: ADA, ALGO, ATOM, FIL, FLOW, ICP, MANA,
 3   MATIC, NEAR, OMG, and SOL (the “Kraken-Traded Securities”).
 4         60.     Each of these Kraken-Traded Securities was offered and sold on the
 5   Kraken Trading Platform or through the Kraken Services during the Relevant Period.
 6         61.     Each of the Kraken-Traded Securities was offered and sold as part of an
 7   investment contract.
 8         62.     Based on the public statements of their respective issuers and
 9   promoters—at least some of which were rebroadcast by Kraken itself on the Kraken
10   Trading Platform—a reasonable investor would have understood the offer and sale of
11   each of the Kraken-Traded Securities as offers and sales of investment contracts.
12   Specifically, purchasers of the Kraken-Traded Securities would reasonably have
13   expected to profit from the efforts of these issuers and promoters to grow and
14   maintain the technology platforms and blockchain ecosystems associated with these
15   crypto assets because such growth or operations could in turn increase the price of the
16   underlying crypto asset and/or provide increased value to holders of the Kraken-
17   Traded Securities.
18         63.     Further, the economic reality of the offerings as presented by their
19   respective issuers and promoters—and rebroadcast by Kraken itself—would have
20   indicated to a reasonable investor that future profits through the increased value of
21   the Kraken-Traded Securities would come through the efforts of these issuers and
22   promoters.
23         64.     In light of the ongoing statements and efforts of these issuers and
24   promoters, such as those set forth below, this expectation would have persisted
25   whether the investor acquired the Kraken-Traded Securities from the issuer or from
26   other investors.
27         65.     For example, FIL is the native crypto token of the Filecoin network, a
28   self-described open-source data storage network that runs on a blockchain created by
       COMPLAINT                                 16
                 Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 17 of 90

 1   Protocol Labs, Inc. Protocol Labs conducted initial sales of FIL in 2017, saying the
 2   sales “raised the funding necessary to grow our team, to create the network, and build
 3   all the software tools needed to operate and use the network.” Underscoring the
 4   aligned financial incentives between the network and the FIL token, Protocol Labs
 5   publicly stated, “Filecoin success will reward the investment of supporters like you
 6   by simultaneously driving down the cost of storage and increasing the value of the
 7   Filecoin tokens that incentivize miners to provide storage.”
 8         66.     FIL has been available for purchase and sale on the Kraken Trading
 9   Platform and through the Kraken Services since October 2020. And Kraken’s own
10   public statements about FIL have since reinforced the expectation of profits from an
11   investment in FIL due to the managerial efforts of Protocol Labs. As Kraken has
12   stated on its website: “If the Filecoin network grows and more users trust it with their
13   data, and more miners supply disk-space, then the amount of transactions requiring
14   FIL should grow. The price of FIL should rise since the amount of FIL available is
15   limited.”
16         67.     Section V.E of this Complaint provides further allegations specific to the
17   11 Kraken-Traded Securities, detailing the development of these crypto assets and the
18   public statements and economic realities based upon which reasonable investors
19   would have expected to profit from these crypto assets.
20         C.      Kraken Was Required to Register with the Commission
21         68.     Because the crypto assets available through the Kraken Trading Platform
22   and the Kraken Services included crypto asset securities traded as investment
23   contracts, Kraken was subject to U.S. securities laws.
24         69.     As previously noted, to fulfill the purposes of the Exchange Act,
25   Congress imposed registration and disclosure obligations on certain defined
26   participants in the national securities markets, including but not limited to brokers,
27   dealers, exchanges, and clearing agencies.
28         70. During the Relevant Period, Kraken acted as an exchange, broker,
       COMPLAINT                              17
                 Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 18 of 90

 1   dealer, and clearing agency with respect to crypto asset securities.
 2         71.     Nonetheless, Kraken has never registered with the Commission as a
 3   national securities exchange, broker, dealer, or clearing agency. Moreover, there is
 4   no exemption from registration with the Commission that would apply to Kraken.
 5                 1.    Kraken Failed to Register as a National Securities Exchange
 6                       a.     Registration of Exchanges
 7         72.     In enacting registration provisions for national securities exchanges,
 8   Congress found in Section 2(3) of the Exchange Act [15 U.S.C. §78b(3)] that:
 9                 Frequently the prices of securities on such exchanges and
                   markets are susceptible to manipulation and control, and the
10                 dissemination of such prices gives rise to excessive
                   speculation, resulting in sudden and unreasonable
11                 fluctuations in the prices of securities which (a) cause
                   alternately unreasonable expansion and unreasonable
12                 contraction of the volume of credit available for trade,
                   transportation, and industry in interstate commerce, (b)
13                 hinder the proper appraisal of the value of securities and
                   thus prevent a fair calculation of taxes owing to the United
14                 States and to the several States by owners, buyers, and
                   sellers of securities, and (c) prevent the fair valuation of
15                 collateral for bank loans and/or obstruct the effective
                   operation of the national banking system and Federal
16                 Reserve System.
17         73.     Accordingly, Section 5 of the Exchange Act [15 U.S.C. § 78e] requires
18   an organization, association, or group of persons that meets the definition of
19   “exchange” under Section 3(a)(1) of the Exchange Act, unless otherwise exempt, to
20   register with the Commission as a national securities exchange pursuant to Section 6
21   of the Exchange Act.
22         74.     Section 3(a)(1) of the Exchange Act [15 U.S.C. § 78c(a)(1)] defines
23   “exchange” to mean “any organization, association, or group of persons, whether
24   incorporated or unincorporated, which constitutes, maintains, or provides a market
25   place or facilities for bringing together purchasers and sellers of securities or for
26   otherwise performing with respect to securities the functions commonly performed by
27   a stock exchange as that term is generally understood, and includes the market place
28   and the market facilities maintained by such exchange.”
       COMPLAINT                                  18
                 Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 19 of 90

 1         75.     Exchange Act Rule 3b-16(a) [17 C.F.R. § 240.3b-16(a)] further defines
 2   certain terms in the definition of “exchange” under Section 3(a)(1) of the Exchange
 3   Act, including “[a]n organization, association, or group of persons,” as one that: “(1)
 4   [b]rings together the orders for securities of multiple buyers and sellers; and (2)
 5   [u]ses established, non-discretionary methods (whether by providing a trading facility
 6   or by setting rules) under which such orders interact with each other, and the buyers
 7   and sellers entering such orders agree to the terms of a trade.”
 8         76.     Registration of a trading platform as an “exchange” under the Exchange
 9   Act is a bedrock Congressional requirement that permits the SEC to carry out its role
10   overseeing the national securities markets.
11         77.     For example, registered exchanges must enact rules that, as required by
12   Section 6 of the Exchange Act, are “designed to prevent fraudulent and manipulative
13   acts and practices, to promote just and equitable principles of trade … and, in general,
14   to protect investors and the public interest.”
15         78.     These rules are subject to review by the SEC under Section 19 of the
16   Exchange Act [15 U.S.C. § 78s], both at the time of initial registration and
17   subsequently whenever the exchange wishes to add, delete, or amend a rule. This
18   review process is designed to ensure that securities marketplaces operate in a manner
19   consistent with the Exchange Act as their practices and procedures evolve over time
20   and to protect investors and the integrity of securities markets that affect national
21   commerce and the economy.
22                       b.     Kraken Operates an Unregistered Securities Exchange
23         79.     During the Relevant Period, Kraken used means and instrumentalities of
24   interstate commerce to bring together the orders of multiple buyers and sellers of
25   crypto asset securities, including the Kraken-Traded Securities. Using a trading
26   facility programmed with non-discretionary rules under which orders interact, Kraken
27   connected these buyers and sellers to agree upon terms for trades in these securities.
28   As a result, Kraken maintained and provided a marketplace for bringing together
      COMPLAINT                                 19
                  Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 20 of 90

 1   buyers and sellers of securities. Kraken was therefore required to register with the
 2   Commission as a national securities exchange or operate pursuant to an exemption to
 3   such registration but failed to do so.
 4          80.     The Kraken Trading Platform makes available to its customers more
 5   than 220 crypto assets, including crypto asset securities, for trading.
 6          81.     Kraken operates the Kraken Trading Platform through the use of a
 7   “trading engine” that matches customer orders based, in part, on price and time
 8   priority.
 9          82.     Orders are stored in Kraken’s central limit order book, a common
10   functionality for many exchanges that tracks the price, size, time of submission, and
11   other characteristics of each submitted order. Kraken maintains a separate order book
12   for each crypto asset trading pair.
13          83.     Kraken not only engaged in the conduct of a securities exchange, it
14   described itself as one. Kraken describes its operations, the Kraken Trading
15   Platform, and the Kraken Services using terms from securities laws and the securities
16   industry. For example, Kraken calls its Trading Platform an “Exchange” or the
17   “Kraken Exchange.”
18          84.     According to a document prepared by Kraken’s finance department in
19   September 2022:
20          [The] trading platform (the “Exchange” or “Kraken Exchange”) allows
            institutional and retail investors (the ‘customers’) to purchase, sell or
21          exchange [a crypto asset] for another [crypto asset] or fiat currency.
            Customers can initiate a limit order, market order, and certain other order
22          types similar to those available on a traditional commodities or stock
            exchanges. Kraken then fills those orders using an internally developed
23          matching algorithm that allows multiple order transactions being matched
            amongst each other.
24
25          85.     Kraken further acted as an exchange by: (i) handling customer
26   applications, order entries, and displaying order information; (ii) offering a variety of
27   order types; (iii) charging fees per executed order; and (iv) matching the orders of
28   buyers and sellers.
       COMPLAINT                                   20
                 Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 21 of 90

 1                              i.    Customer Applications, Order Entry, and Display
 2         86.     Kraken allows customers to enter orders to trade on the Kraken Trading
 3   Platform via Kraken’s customer applications or an API. An API is a software
 4   intermediary permitting two programs to communicate.
 5         87.     Kraken itself also may enter orders into the Kraken Trading Platform as
 6   principal and be a counterparty to trades against customers. Customers are not
 7   provided with any disclosures as to whether the counterparty to their trade on the
 8   Kraken Trading Platform is another Kraken customer or Kraken acting as principal,
 9   or any additional protections when Kraken is acting as principal.
10         88.     Through Kraken’s customer applications or API, Kraken customers can
11   place a variety of buy and sell orders for crypto assets, including crypto asset
12   securities. Through the Kraken Trading Platform, Kraken then matches the orders of
13   buyers and sellers with each other.
14         89.     Kraken provides customers with a live feed of Kraken’s order book—
15   which shows bids and offers for each crypto asset available for trading on the
16   platform—as well as a crypto asset’s trading history on the Kraken Trading Platform.
17   A customer may also view their own account information, including the customer’s
18   trade history, and the prices and sizes of its executed trades.
19         90.     Kraken has multiple customer applications, including web, mobile, and
20   desktop applications. Some are designed to be “beginner friendly,” and others are
21   designed for a “professional trading experience.”
22         91.     The “professional” style applications offer features that mimic trading
23   terminals offered or used by registered securities intermediaries. For example,
24   Kraken advertises its “Kraken Pro” application as “a one-stop destination for
25   advanced crypto traders” that is “fully equipped with must-have advanced trading
26   tools and features, addressing all your trading needs in one place,” where traders can
27   “identify trades with full-featured charting, technical indicators and compare up to 4
28   markets at once” as well as “monitor the action with live order books and streaming
      COMPLAINT                                   21
                 Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 22 of 90

 1   trades.”
 2         92.     From 2017 until it was retired on September 30, 2023, Kraken offered an
 3   application named Cryptowatch which it described as a “premium trading terminal.”
 4   Through Cryptowatch, Kraken provided “trading services for over 25 cryptocurrency
 5   exchanges,” including the Kraken Trading Platform. Cryptowatch, among other
 6   things, allowed Kraken customers to place orders on “multiple crypto exchanges from
 7   a single platform.” For example, Kraken customers who were also customers of one
 8   of those “exchanges” could place orders on that trading platform using the
 9   Cryptowatch application’s automated connection.
10         93.     Kraken’s website (www.Kraken.com) also functioned as a web-based
11   application providing customers with an interface for trading crypto assets on the
12   Kraken Trading Platform. A tab or link on the Kraken website called “Markets” led
13   customers to a page listing the current price for the hundreds of crypto assets
14   available for trading on the Kraken Trading Platform, and also displayed the high and
15   low price for each asset over the previous 24 hours, the percentage change in price
16   during that same period, and the total value of all trading of that asset that occurred
17   over that period.
18         94.     The crypto assets listed on the “Markets” page were listed by full name
19   and trading symbol and displayed in descending order from largest to smallest based
20   on the previous 24-hour trading volume. The “Markets” page also displayed
21   approximately five crypto assets under the category of “trending” for those assets that
22   had the highest volume of trading over the previous 24 hours and those that had the
23   highest percentage of gains or losses in value over that same period.
24         95.     Another tab or link on the Kraken Trading Platform website called
25   “Trade” led visitors to a listing of the order book for the various crypto assets
26   available for trade on the platform. One side of the order book displays the current
27   buy orders in descending order from highest bid price to lowest while the other side
28   of the order book displays the sell orders in ascending order from lowest asking price
       COMPLAINT                                    22
                    Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 23 of 90

 1   to the highest.
 2            96.     The “Trade” page also displayed a “price chart” graph for the selected
 3   crypto asset which reflects the trading volume of the token over a selected period of
 4   time (i.e., 1 day, 5 days, 1 month, 3 months, 6 months, 1 year, 5 years) and a “depth
 5   chart” graph which displayed the current “mid-market price” (i.e., the middle point
 6   between the highest bid price and lowest asking price for a particular asset) and the
 7   “spread” (i.e., the difference between the highest bid and lowest asking price) for that
 8   asset.
 9                                 ii.   Order Types
10            97.     Kraken offers the ability for buyers and sellers to place multiple order
11   types, including but not limited to, market (trade at the best available price in the
12   order book), limit (trade at a specified price or better), stop loss (market order
13   triggered at the stop price), take profit (market order entered when last traded price
14   reaches a specified price), and settle position (closes a customer’s margin position).
15            98.     Kraken requires customers, when submitting orders, to input various
16   parameters, including those similar to parameters used in trading non-crypto
17   securities: crypto asset trading symbol, size, price, and order type. Customers may
18   also place automated, algorithmic trades using Kraken’s APIs.
19            99.     Kraken offers certain customers the ability to trade using margin on the
20   Kraken Trading Platform. Kraken extends margin credit (from its proprietary
21   inventory) to these customers for buying and selling certain crypto assets, including
22   crypto asset securities. Kraken charges percentage-based fees for opening a
23   leveraged position as well as for maintaining a leveraged position.
24            100. Unless trading on margin, a Kraken customer must have an available
25   balance of the relevant crypto asset or fiat currency in their account to cover the total
26   value of the order plus any applicable fees.
27            101. All orders are stored in Kraken’s order book.
28
       COMPLAINT                                      23
               Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 24 of 90

 1                             iii.   Fees
 2         102. Similar to brokers and exchanges in the traditional securities markets,
 3   Kraken charges a fee or commission on each executed trade.
 4         103. Kraken’s transaction-based fees vary depending on the trading pair, a
 5   user’s 30-day trading volume, and other factors.
 6         104. Kraken’s website states: “[T]rading fees are reduced according to the
 7   USD value of [the customer’s] total volume traded by [a customer’s] account over the
 8   previous 30 days.” Kraken’s website states that Kraken “reward[s] user[s] who drive
 9   liquidity to Kraken” and “[t]he more you trade, the more you save.”
10         105. More specifically, Kraken uses a maker-taker fee schedule with volume
11   incentives based on the customer’s previous 30-day activity. In a maker-taker model,
12   an executed order that takes liquidity is charged a fee, while the resting order that
13   makes liquidity (the order against which the taker order executes) is given a rebate,
14   which is generally less than the amount of the taker fee, allowing the platform to keep
15   the difference.
16         106. Kraken’s maker fee ranges from 0.00% to 0.16% of the principal amount
17   traded, depending on the trader’s 30-day volume.
18         107. The taker fee ranges from 0.10% to 0.26% of the principal amount
19   traded, depending on the trader’s 30-day volume. Kraken deducts the taker fee for
20   each transaction from the customer’s Kraken account.
21                             iv.    Order Matching
22         108. The Kraken Trading Platform matches the orders of buyers and sellers
23   pursuant to rules that Kraken has programmed into its matching engine.
24         109. After a buyer or seller enters an order, Kraken’s software performs
25   certain checks, such as for erroneous order conditions, disruptive pricing, self-trading
26   and other violations of Kraken policies, and ensures that the customer has sufficient
27   funds (in the form of crypto assets, fiat currency, or margin) to settle any resulting
28   transaction and pay applicable fees.
       COMPLAINT                                   24
               Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 25 of 90

 1         110. If the order passes these checks, Kraken sends the order to its central
 2   limit order book where it is eligible to be matched and executed by the Kraken
 3   Trading Platform’s automated matching engine (the “Kraken Matching Engine”).
 4         111. Aside from periods of maintenance or outages, the Kraken Trading
 5   Platform is always open for trades, operating 24 hours a day, every day.
 6         112. The servers for the Kraken Matching Engine are located within the
 7   United States.
 8         113. If an order is not immediately executed upon entry, the Kraken Trading
 9   Platform will include the order in its order book for potential matching with one or
10   more orders from other buyers or sellers. The platform will then update the
11   customer’s account balance to reflect the open order.
12         114. There is an order book for each crypto asset trading pair, e.g., an order
13   for trading U.S. Dollars to the crypto asset security called “Cardano” and represented
14   by the trading symbol “ADA” may be referred to as the “ADA-USD” order book.
15   The Kraken Matching Engine matches orders based on price-time priority within that
16   order book.
17         115. Kraken describes publicly on its website some of the “detailed trading
18   rules for operating” the Kraken Trading Platform. Kraken’s website informs traders
19   that: (i) orders placed on Kraken’s order book are prioritized according to price; (ii)
20   buy orders are prioritized in decreasing order of price with the highest bid placed at
21   the top of the order book; (iii) sell orders are prioritized in increasing order of price
22   with the lowest ask placed at the top of the order book; (iv) orders with same price
23   are aggregated in the order book and are filled in a first in, first out manner; and (v)
24   conditional orders are stored separately from the order book on a “not held” or
25   reserved basis and are placed on the order book when an asset’s price meets the pre-
26   specified condition and price.
27                              v.     Direct Sales
28        116. Kraken does not restrict issuers or promoters from publicly offering and
       COMPLAINT                                25
               Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 26 of 90

 1   selling crypto assets, including each of the Kraken-Traded Securities, on the Kraken
 2   Trading Platform. Nor does Kraken implement any policies or procedures to prevent
 3   issuers from offering and selling their crypto assets to the public on the Kraken
 4   Trading Platform.
 5         117. Multiple issuers sold their respective crypto assets on the Kraken
 6   Trading Platform through market makers.
 7         118. Kraken is aware that crypto asset issuers offer and sell their own
 8   holdings via the Kraken Trading Platform, in part because Kraken itself facilitated
 9   them doing so.
10         119. For example, the issuer of ALGO (the native crypto asset to the
11   Algorand blockchain) used a market maker (“Market Maker 1”) to offer and sell
12   ALGO, including on the Kraken Trading Platform.
13         120. In April 2020, a representative of Market Maker 1 emailed Kraken
14   representatives, stating in part, “As you know we are providing liquidity for a number
15   of customers (token issuers), Algorand is the only one from our existing customers
16   that is listed in Kraken and we would like to know if we can help you in any way
17   with your due diligence with other [Market Maker 1] customers that would in my
18   opinion be suited for Kraken.”
19         121. In response, a Kraken representative stated, in part, “I saw [Market
20   Maker 1] and assumed straight market making-related discussions” and that another
21   Kraken representative was “moving forward with all new asset reviews.” A call was
22   arranged to “cover both new asset DD + MM discussions.”
23         122. In this context, “DD” is shorthand for “due diligence” and “MM” is
24   shorthand for “market maker.”
25         123. In May 2020, the Kraken representative emailed the Market Maker 1
26   representative, stating in part, “I hope that you have been well since we spoke a few
27   weeks ago. As a quick follow-up, I wanted to provide some general benefits and
28   liquidity guidelines that we look for in MM parents (attached). It would also be great
        COMPLAINT                                26
               Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 27 of 90

 1   to explore how Kraken and [Market Maker 1] can further collaborate going forward.
 2   Do you have for a call early next week to discuss these?”
 3         124. Market Maker 1 also offered and sold ADA, FIL, FLOW, ICP, MATIC
 4   and NEAR via the Kraken Trading Platform on behalf of their respective issuers.
 5         125. Other market makers offered and sold crypto assets via the Kraken
 6   Trading Platform on behalf of their issuers.
 7         126. The issuers of the following Kraken-Traded Securities all sold their
 8   respective crypto asset securities on the Kraken Trading Platform through market
 9   makers during the Relevant Period: ADA, ALGO, FIL, FLOW, ICP, MATIC, and
10   NEAR.
11         127. Such sales were part of the respective issuer’s offers and sales of their
12   crypto asset securities into the public trading markets.
13         128. Kraken did not inquire or query whether a market maker was selling
14   crypto assets on behalf of an issuer.
15                2.     Kraken Failed to Register as a Broker-Dealer
16                       a.    Registration of Broker-Dealers
17         129. Absent an applicable exemption or exception, Section 15(a) of the
18   Exchange Act [15 U.S.C. § 78o(a)] generally requires brokers and dealers to register
19   with the SEC, and a broker or dealer must also become a member of one or more
20   “self-regulatory organizations” (“SROs”), which in turn require members to adhere to
21   rules governing the activities of the SRO’s members.
22         130. Section 3(a)(4) of the Exchange Act [15 U.S.C. § 78c(a)(4)] defines
23   “broker” generally as “any person engaged in the business of effecting transactions in
24   securities for the account of others.”
25         131. Section 3(a)(5) of the Exchange Act [15 U.S.C. § 78c(a)(5)] defines
26   “dealer” generally as “any person engaged in the business of buying and selling
27   securities for his own account, through a broker or otherwise.”
28        132. The regulatory regime applicable to broker-dealers is a cornerstone of
       COMPLAINT                              27
                Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 28 of 90

 1   the federal securities laws and provides important safeguards to investors and market
 2   participants. Registered broker-dealers are subject to comprehensive regulation and
 3   rules that include recordkeeping and reporting obligations, SEC and SRO
 4   examination, and general and specific requirements aimed at addressing conflicts of
 5   interest, among other things. All of these rules and regulations are critical to the
 6   soundness of the national securities markets and to protecting investors in the public
 7   markets.
 8         133. To preserve the maintenance of fair and orderly markets, avoid conflicts
 9   of interests, and protect investors, Section 11(a) of the Exchange Act [15 U.S.C. §
10   78k(a)] prohibits broker-dealers from effecting transactions for their own accounts on
11   exchanges where they are a member.
12         134. Further, broker-dealers must abide by certain financial responsibility
13   requirements under the Exchange Act. For example, broker-dealers are required to
14   make and maintain certain business records to assist the firm in accounting for its
15   activities and to assist securities regulators in examining the firm’s compliance with
16   securities laws. 17 C.F.R. § 240.17a-3, 17a-4. Broker-dealers are also prohibited
17   under what is known as the “Customer Protection Rule” from using customer
18   securities and cash to finance their own business. 17 C.F.R. § 240.15c3-3. By
19   segregating customer securities and cash from a firm’s proprietary business activities,
20   the rule increases the likelihood that customer assets will be readily available to be
21   returned to customers if a broker-dealer fails.
22                       b.     Kraken Functions as a Broker
23         135. During the Relevant Period, Kraken used, and continues to use, means
24   and instrumentalities of interstate commerce to effect transactions in crypto asset
25   securities for the accounts of others, and regularly participated in these securities
26   transactions at key points in the chain of distribution.
27         136. Kraken solicited, and continues to solicit, potential investors in crypto
28   asset securities and hold itself out as selling crypto asset securities.
       COMPLAINT                                     28
               Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 29 of 90

 1         137. As alleged above, Kraken provided, and continues to provide, a system
 2   for customers to enter orders in securities, to route and handle those customer orders,
 3   and to take compensation by charging customers fees for these services.
 4         138. Kraken handled, and continues to handle, customer funds and customers’
 5   crypto asset securities (which it commingled and treated as fungible with its own
 6   crypto assets) through Kraken-controlled accounts and crypto wallets.
 7         139. Kraken was therefore required to register with the Commission as a
 8   broker but did not do so.
 9                               i.   Kraken Views Itself as a Broker and Solicits
10                                    Customers for Trading Crypto Asset Securities
11         140. In internal documents, Kraken calls itself a “broker” and states that its
12   operations are similar to brokers in traditional markets.
13         141. Internally, Kraken identifies itself as a broker in other ways. For
14   example, on a Kraken corporate organizational chart, Kraken labels Payward
15   Ventures (along with other Kraken entities) as a client-facing “Broker Entity.”
16         142. In its internal policies, Kraken refers to Payward Ventures as a “Local
17   Spot Broker” or the acronym “LSB.”
18         143. Kraken further refers to its customer accounts containing crypto assets or
19   fiat as a customer’s “brokerage account.”
20         144. Kraken regularly solicits customers to open accounts at Kraken to trade
21   crypto assets, including the Kraken-Traded Securities, on the Kraken Trading
22   Platform and through the Kraken Services, including through marketing and posts on
23   its website, applications, and on social media.
24         145. For example, Kraken has posted on X (formerly known as Twitter), with
25   the handle “@KrakenFX” information about: crypto assets, including crypto asset
26   securities, available to trade on the Kraken Trading Platform, including new assets or
27   those newly available for margin trading; Kraken’s promotions for customers; trading
28   support notifications; enhanced trading features of the Kraken Trading Platform; links
       COMPLAINT                                  29
                 Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 30 of 90

 1   to Kraken interviews and publications; and responses to specific posts by Kraken
 2   customers.
 3         146. Kraken regularly posts comments in the Kraken forum on Reddit,
 4   including referring customers to Kraken’s support services and providing updates
 5   about the status of the Kraken Trading Platform.
 6         147. Kraken regularly posts to its blog (blog.kraken.com) promotional
 7   materials and information encouraging customers to trade crypto assets, including
 8   crypto asset securities, on the Kraken Trading Platform and through the Kraken
 9   Services.
10         148. Through these various communication channels, Kraken provides
11   instructions to potential customers on how to open a trading account.
12         149. Through its website and applications, Kraken provides detailed
13   information about the crypto assets, including the Kraken-Traded Securities, that
14   trade on the Kraken Trading Platform and through the Kraken Services, including
15   price charts and market statistics, price movements, volume, and information about
16   how to trade those crypto assets. For example, Kraken maintains a “Learn” webpage
17   and online “Crypto Guides” that provide resources regarding crypto assets and
18   trading crypto assets, as well as a “Prices” webpage that highlights top “Trending
19   Cryptocurrencies” and crypto assets with the “Biggest Gains.”
20         150. Kraken also has marketed monetary incentives and promotions aimed at
21   attracting more customers to the Kraken Trading Platform. For example, in or around
22   November 2019, Kraken launched the “Kraken Affiliate Program,” which rewards
23   existing Kraken customers who refer new customers to Kraken. Under the Kraken
24   Affiliate Program, existing Kraken customers receive “20% on the trading fees
25   collected from clients you refer to us for the lifetime of the client with Kraken – up to
26   $1,000 USD payout per referral.”
27                             ii.    Kraken Controls Customer Assets
28        151. In 2021, Kraken held more than $5 billion in customer fiat and more
       COMPLAINT                             30
               Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 31 of 90

 1   than $33 billion in customer crypto assets.
 2         152. Kraken maintains its customers’ crypto assets and funds in crypto
 3   wallets and bank accounts that it controls.
 4         153. To deposit crypto assets into a Kraken trading account, customers must
 5   transfer crypto assets from an existing crypto wallet to a Kraken-controlled crypto
 6   wallet. Similarly, to deposit fiat currency into a Kraken trading account, customers
 7   must make a deposit to a Kraken-controlled bank account using a wire transfer, bank
 8   transfer, or other means.
 9         154. When a customer submits a request to withdraw funds or crypto assets,
10   Kraken transfers them from a Kraken-controlled bank account or crypto wallet to the
11   customer’s designated account or crypto wallet.
12         155. According to Kraken’s terms of service, all digital assets held in a
13   Kraken account are “custodial assets held by Payward for” the benefit of the
14   customer. Kraken disclaims any ownership or title to digital assets held in Kraken
15   customer accounts.
16         156.    Kraken uses shared blockchain addresses called “omnibus accounts,”
17   which it controls, to hold crypto assets on behalf of customers. Kraken holds the
18   private keys for these addresses and maintains internal, or off-chain ledgers, to record
19   individual customer holdings for their respective accounts.
20         157. In documents provided to its auditor, Kraken stated “crypto assets are
21   not separated by type of client, geography, margin vs. non-margin etc.”
22                               iii.   Kraken Offers Trading on Margin
23         158. During the Relevant Period, Kraken offered, and continues to offer,
24   extensions of margin credit (from its proprietary inventory) to customers for buying
25   and selling certain crypto assets, including crypto asset securities.
26         159. Kraken advertises on its website that it offers “over 100 margin-enabled
27   markets for you to buy (go ‘long’) or sell (go ‘short’) a growing number of
28   cryptocurrencies with up to 5x leverage.”
       COMPLAINT                                    31
                 Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 32 of 90

 1            160. If executed, margin transactions are executed on the Kraken Trading
 2   Platform using the Kraken Matching Engine.
 3            161. Kraken maintains physical or constructive custody of all crypto assets or
 4   fiat currency using margin for the duration of a customer’s open margined position.
 5            162. Kraken charges additional fees for margin orders.
 6            163. Kraken charges percentage-based fees, based on the amount of margin
 7   credit extended, for opening a leveraged position as well as maintaining a leveraged
 8   position.
 9                        c.     Kraken Functions as a Dealer
10            164. During the Relevant Period, Kraken used means and instrumentalities of
11   interstate commerce to effect transactions in crypto asset securities while engaged in
12   the business of buying and selling securities for its own account. Through the Kraken
13   Services, such as Instant Buy and the OTC Desk, as well as its own proprietary
14   trading, Kraken bought and sold crypto asset securities on multiple platforms,
15   including the Kraken Trading Platform, as part of its regular business. Kraken was
16   therefore required to register with the Commission as a securities dealer but did not
17   do so.
18                               i.      Instant Buy
19            165. Kraken Instant Buy allows customers to “instantly” buy, sell, or
20   “convert” crypto assets, including the Kraken-Traded Securities, with Kraken acting
21   as the counterparty in all cases.
22            166. Kraken’s website states that the Instant Buy feature “allows you to
23   convert between any crypto and cash assets.”
24            167. To use the service, a customer logs in to her account and click Buy, Sell,
25   or Convert. The customer would then be presented with a default asset and a price
26   offered by Kraken to Buy, Sell, or Convert the asset.
27            168. To change the asset, the customer opens a search field where she can
28   scroll through a list of assets (shown with the asset’s price) or type in the name of the
       COMPLAINT                                    32
                 Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 33 of 90

 1   asset to Buy, Sell, or Convert.
 2         169. Kraken charges users of the Instant Buy feature a fee and in certain
 3   cases, a “spread.”
 4         170. Kraken does not publish a general fee schedule or explain when or how a
 5   “spread” will be charged in addition to the fee. Instead, Kraken displays the fees for
 6   the particular transaction.
 7         171. The customer must agree to the price for the asset offered by Instant Buy
 8   as well as the transaction fee, which Kraken assesses if the transaction is executed.
 9         172. The price quote Kraken provides to a customer in the Instant Buy feature
10   is derived from Kraken’s review of the pending orders on its order book on the
11   Kraken Trading Platform.
12         173. For example, if a customer wants to purchase 10 units of the Kraken-
13   Traded Security Cardano (ADA) using Instant Buy, Kraken reviews the order book
14   for ADA on the Kraken Trading Platform and presents a price quote valid for a
15   specified period of time and the fees it would charge to complete the transaction. If
16   the customer accepts, Kraken then uses or leverages its own capital or crypto assets to
17   acquire the 10 ADA on the Kraken Trading Platform, and then sells these 10 ADA to
18   its customer and promptly settles the trade by ledger debits and credits.
19                                 ii.   OTC Desk
20         174.    During the Relevant Period, Kraken offered the OTC Desk as a
21   “premium service that allows traders to execute orders off the open Kraken
22   exchange” for large orders of crypto assets, including the Kraken-Traded Securities,
23   valued at $100,000 or more (although it may service smaller orders).
24         175. Customers may send a request for a quote to the OTC Desk. Kraken
25   would typically respond with a quote at which it would be willing to trade with the
26   customer.
27         176. Kraken acts as principal to fill orders placed through the OTC Desk.
28        177. To fill the orders placed with the OTC Desk, Kraken uses proprietary
       COMPLAINT                                33
                Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 34 of 90

 1   assets, places orders (in its own account) on the Kraken Trading Platform, uses its
 2   own inventory, or places orders on third-party trading platforms.
 3           178. Customers interface with the OTC Desk through email or telephone, or
 4   by logging into their Kraken account and using the OTC Desk’s online portal or an
 5   online chat function.
 6           179. On its website, Kraken states, “We do not charge you any fees for our
 7   [OTC Desk] service. The bid or offer price we show is the ‘all inclusive’ price.”
 8           180. Kraken’s Terms of Service state that it may charge a mark-up or mark-
 9   down “between the price [Kraken] buys or sells an Asset in a transaction with you
10   and the price it is able to obtain in subsequent transactions with third parties, and . . .
11   such spread will not be reflected in the transaction fees you are charged at the time of
12   your purchase or sale.”
13           181. Kraken’s OTC Desk settles transactions in various ways depending on
14   the manner it filled the customer’s order.
15           182. Kraken offered the OTC desk for orders of crypto assets, including
16   Kraken-Traded Securities.
17                              iii.   Proprietary Trading
18           183.   During the Relevant Period, Kraken also engaged in proprietary trading
19   of crypto assets, including crypto asset securities and Kraken-Traded Securities, for
20   its own account separate from the Kraken Services.
21           184. According to Kraken’s financial statements, it stopped engaging in
22   proprietary trading separate from the Kraken Services during the second quarter of
23   2020.
24           185. From the beginning of 2020 until it stopped in the second quarter,
25   Kraken generated approximately $47 million in revenue from the proprietary trading
26   of crypto assets.
27
28
       COMPLAINT                                     34
                Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 35 of 90

 1                 3.     Kraken Failed to Register as a Clearing Agency
 2                        a.     Registration of Clearing Agencies
 3          186. Congress has determined that “[t]he prompt and accurate clearance and
 4   settlement of securities transactions, including the transfer of record ownership and
 5   the safeguarding of securities and funds related thereto, are necessary for the
 6   protection of investors and persons facilitating transactions by and acting on behalf of
 7   investors.” 15 U.S.C. § 78q-1.
 8          187. Section 17A(b) of the Exchange Act [15 U.S.C. § 78q-1(b)] accordingly
 9   generally makes it unlawful “for any clearing agency, unless registered in accordance
10   with this subsection, directly or indirectly, to make use of the mails or any means or
11   instrumentality of interstate commerce to perform the functions of a clearing agency
12   with respect to any security.”
13          188. Section 3(a)(23)(A) of the Exchange Act [15 U.S.C. § 78c(a)(23)(A)]
14   defines the term “clearing agency” as “any person who acts as an intermediary in
15   making payments or deliveries or both in connection with transactions in securities or
16   who provides facilities for comparison of data respecting the terms of settlement of
17   securities transactions, to reduce the number of settlements of securities transactions,
18   or for the allocation of securities settlement responsibilities,” as well as “any person
19   … who (i) acts as a custodian of securities in connection with a system for the central
20   handling of securities whereby all securities of a particular class or series of any
21   issuer deposited within the system are treated as fungible and may be transferred,
22   loaned, or pledged by bookkeeping entry without physical delivery of securities
23   certificates, or (ii) otherwise permits or facilitates the settlement of securities
24   transactions or the hypothecation or lending of securities without physical delivery of
25   securities certificates.”
26          189. Registered clearing agencies are subject to comprehensive regulation—
27   including recordkeeping requirements and SEC examination—under the Exchange
28   Act and the rules thereunder, providing important safeguards to investors and market
      COMPLAINT                                  35
               Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 36 of 90

 1   participants, and to the maintenance of fair competition. Moreover, properly
 2   registered clearing agencies must enact a set of rules to govern their and their
 3   members’ behavior, and these rules are subject to review by the SEC.
 4                        b.   Kraken Functions as a Clearing Agency
 5         190. During the Relevant Period, Kraken’s conduct in the settlement of crypto
 6   asset securities transactions and as a security depository with respect to crypto asset
 7   securities traded on the Kraken Trading Platform and through the Kraken Services,
 8   including Instant Buy and the OTC Desk, constitutes clearing agency activity.
 9   Kraken was therefore required to register with the Commission as a clearing agency
10   but did not do so.
11         191. Kraken has and continues to act as an intermediary in making payments
12   and deliveries when facilitating the settlement of crypto asset securities transactions,
13   including transactions in the Kraken-Traded Securities.
14         192. After a customer order is matched, resulting in a trade (whether against
15   another customer or Kraken itself), Kraken settles the trade through its internal ledger
16   system by debiting and crediting the relevant balances of funds or crypto assets in the
17   customer’s (or customers’) account(s).
18         193. According to a Kraken internal document, its internal ledgers are
19   “designed to function similarly to a ‘stock record’ account, like the one that is
20   typically maintained by a broker-dealer that custodies its customers’ holdings.”
21         194. In this way, all trades on Kraken’s Trading Platform “occur ‘off-chain’
22   on the Kraken Exchange,” meaning that they are recorded and settled on Kraken’s
23   internal ledgers without any crypto asset being transferred from one blockchain
24   address to another (i.e., “on-chain”).
25         195. According to trading rules posted on Kraken’s website, after matching
26   buy and sell orders, “Kraken settles all filled orders immediately, by debiting and
27   crediting the relevant balances of assets in both traders’ accounts.”
28        196. Kraken’s Terms of Service state that Kraken will use “commercially
       COMPLAINT                              36
                Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 37 of 90

 1   reasonable efforts to settle trades” within two days of execution.
 2         197. Kraken has and continues to act as a security depository for crypto asset
 3   securities, including the Kraken-Traded Securities, that are traded on the Kraken
 4   Trading Platform and through the Kraken Services.
 5         198. Kraken holds these crypto assets in omnibus wallets for which Kraken
 6   holds the private keys, and Kraken provides a system for the central handling of
 7   securities whereby crypto asset securities are treated as fungible and ownership
 8   entitlements are transferred by bookkeeping entry without any on-chain transfers.
 9         D.     Kraken’s Business Practices Create Heightened Risks for its
10                Customers
11         199.    As an unregistered entity that nonetheless operates as a securities
12   broker, dealer, exchange, and clearing agency, Kraken operates in ways that would
13   not be permissible under the federal securities laws and regulations.
14                1.     Kraken Fails to Separate the Competing Functions of Its
15                       Business
16         200. In U.S. securities markets, the functions of “exchanges,” “broker-
17   dealers,” and “clearing agencies” described above are typically carried out by
18   separate legal entities that are independently registered and regulated by the SEC.
19   Separation of these core functions aims to minimize conflicts between the interests of
20   securities intermediaries and the investors they serve. Registration and concomitant
21   disclosure obligations allow the SEC to oversee the business of intermediaries and
22   their relationship with investors, in order to, among other things, protect investors
23   from manipulation, fraud, and other abuses.
24         201. While providing the services of an exchange, broker, dealer, and clearing
25   agency to its customers, Kraken does not separate these functions.
26         202. Investors in securities markets do not interact directly with exchanges or
27   clearing agencies but instead are customers of broker-dealers who effect transactions
28   on investors’ behalf. Only broker-dealers (or natural persons associated with a
       COMPLAINT                                 37
               Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 38 of 90

 1   broker-dealer) may become members of a national securities exchange. In addition,
 2   broker-dealers who have customers must become members of the Financial Industry
 3   Regulatory Authority (“FINRA”), an SRO that imposes its own rules and oversight
 4   over broker-dealers, particularly as to protecting retail investors.
 5          203. Kraken is not a member of FINRA.
 6          204. Registered national securities exchanges and clearing agencies are also
 7   SROs, and therefore must submit all of their proposed rules and rule changes to the
 8   SEC for review.
 9          205. Kraken does not submit its rules or proposed rules to the SEC for
10   review.
11          206. As noted, the Exchange Act also subjects registered intermediaries to
12   important record keeping and inspection requirements. For example, Section 17 of
13   the Exchange Act [15 U.S.C. § 78q] requires registered national securities exchanges,
14   broker-dealers, and clearing agencies to make and keep records as the SEC prescribes
15   by rule, and subjects those records to reasonable periodic, special, or other
16   examinations by representatives of the SEC.
17          207. Kraken does not submit itself to examinations by representatives of the
18   SEC.
19          208. These provisions are designed to ensure that intermediaries follow the
20   rules designed to protect investors and to promote fair and efficient operation of the
21   securities markets, given their importance to the economic health of the nation.
22   These provisions also seek to ensure, among other things, that investors’ securities
23   orders are handled fairly and transparently, that securities transactions result in
24   settlement finality, and that investors’ assets are protected and can be recovered if
25   necessary.
26          209. In failing to comply with any SEC registration requirements, Kraken
27   puts its customers’ assets at a higher risk of loss than customers of registered
28   securities intermediaries.
       COMPLAINT                                    38
               Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 39 of 90

 1                2.     Kraken Commingles Its Customers’ Crypto Assets and Fiat
 2                       with Its Own
 3         210. The U.S. securities laws protect customer assets by, among other things,
 4   ringfencing customer assets from corporate use. Had it registered as a broker-dealer,
 5   Kraken would be required to appropriately account for and segregate customer cash
 6   and securities and would be subject to examination, inspection, and disclosure
 7   requirements aimed at detecting and preventing the failure to appropriately segregate
 8   customer assets.
 9         211. Kraken’s Terms of Service stated that “custodial assets held by Payward
10   [are] for [a customer’s] benefit” and title is “not transferred to Payward.”
11         212. Nonetheless, Kraken’s commingles customer crypto assets with its own.
12         213. Commingling customer and proprietary assets creates a risk that, when
13   customers request withdrawals of their assets, those assets might be encumbered
14   (e.g., due to hypothecation, or liens or other interests being filed against such
15   property to secure an obligation of Kraken) or gone completely.
16         214. Concerning Kraken’s custody of crypto assets, in its audit plan for 2022,
17   Kraken’s independent auditor stated: “There is a significant risk of loss of custodial
18   (and proprietary) digital assets through theft/loss of public keys or improper controls
19   over accounting for custodial digital assets that are comingled between customers and
20   with the Company’s proprietary digital assets.”
21         215. Kraken’s Terms of Service also stated that “Payward makes no
22   warranty” that customers’ crypto assets “are held by [the customer] free and clear of
23   any security interest or other lien or encumbrance by Payward or others, including but
24   not limited to Payward’s creditors.”
25         216. With respect to fiat, Kraken maintains bank accounts that are designated
26   as custodial accounts for the purpose of holding customer fiat.
27         217. Kraken maintains separate bank accounts that are designated as
28   operational accounts for the purpose of holding corporate fiat.
       COMPLAINT                                  39
                 Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 40 of 90

 1         218. Yet, Kraken commingles corporate and customer fiat in some of these
 2   accounts.
 3         219. In its 2020 and 2021 financial statements, Kraken describes how it may
 4   commingle custodial funds with its own. Kraken’s financial statements state that
 5   “[a]mounts shown as Customer custodial funds are restricted to use based on the
 6   terms of service with our customers. Such funds may be in separate accounts or
 7   commingled with cash that is unrestricted.” “Unrestricted” cash is Kraken’s
 8   proprietary or corporate cash for which it has “unrestricted rights of withdrawal and
 9   use….”
10         220. Kraken’s independent auditor has observed that as of December 31,
11   2021, approximately $33.6 million of customer custodial fiat appeared to be in
12   Kraken’s operational bank accounts. Kraken’s independent auditor similarly
13   observed that as of December 31, 2020, approximately $30.8 million of customer
14   custodial fiat appeared to be in Kraken’s operational accounts.
15         221. Separately, Kraken treats some fiat in custodial accounts as its own –
16   and not the customers’ – supposedly because Kraken’s customers owe Kraken fees
17   arising from the customers’ trading. For example, Kraken has at times paid
18   operational expenses using funds held in customer custodial accounts. This is
19   another example of improper commingling of funds that increases investor risk and in
20   which registered securities intermediaries are prohibited from engaging.
21         222. Kraken does not disclose to its customers that Kraken commingles
22   customer and corporate fiat in either customer custodial accounts or Kraken’s
23   corporate operating accounts.
24                 3.    Kraken’s Internal Control Failures
25         223. As part of the audit of Kraken’s 2021 financial statements, Kraken’s
26   independent auditor identified multiple control deficiencies and informed Kraken’s
27   board of directors of a significant deficiency in the company’s internal controls.
28        224. In 2023, Kraken found errors relating to customer custodial cash and
       COMPLAINT                              40
                Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 41 of 90

 1   crypto assets held for customers in 2020 and 2021.
 2         225. These errors were a result of Kraken’s poor recordkeeping practices and
 3   failure to properly record margin transactions, underscoring the deficient internal
 4   controls at the company.
 5         226. In materials provided to its auditor, Kraken stated: “In August 2023, the
 6   Company self-identified the possibility of an error.” This error was largely based on
 7   Kraken’s failure to establish a sub-ledger before offering its margin lending product.
 8         227. Kraken’s auditor determined that these errors were material to the 2020
 9   and 2021 financial statements of Payward and Payward Ventures.
10         E.     Crypto Assets Securities Available Through Kraken
11         228. As previously alleged in Section B, Kraken has made available for
12   trading on its platform and through its services many crypto assets that are offered
13   and sold as investment contracts and thus are securities. Each of these crypto asset
14   securities was offered and sold on the Kraken Trading Platform or through the
15   Kraken Services during the Relevant Period. Each of the crypto asset securities was
16   sold as part of an investment contract, which as discussed involves an investment of
17   money in a common enterprise from which the investor reasonably expects profits or
18   returns derived from the entrepreneurial or managerial efforts of others. Set forth
19   below are details regarding certain previously identified Kraken-Traded Securities, 11
20   crypto asset securities which were available on the Kraken Trading Platform and
21   through the Kraken Services.
22                1.    ADA
23         229. “ADA” is the native token of the Cardano blockchain. The Cardano
24   blockchain was created in 2015 by an Ethereum co-founder, Charles Hoskinson, and
25   an Ethereum operations manager, Jeremy Wood. As described on Cardano’s website,
26   the Cardano blockchain protocol is built on its own proof-of-stake consensus protocol
27   called Ouroboros, which is purportedly energy efficient. Hoskinson and Wood
28   created ADA and purported to limit the supply of ADA to 45 billion tokens. From
       COMPLAINT                                41
                 Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 42 of 90

 1   2015 to 2017, Input Output Hong Kong (“IOHK”), a company founded by Hoskinson
 2   and Wood, conducted a token sale during which they sold approximately 25.9 billion
 3   ADA in exchange for bitcoin, at what equates to an average price of $0.0024 per
 4   token, raising approximately $62 million for Cardano.
 5         230. From the time of its offering and continuing through the Relevant
 6   Period, ADA was offered and sold as an investment contact and is therefore a
 7   security.
 8         231. The price of all ADA tokens goes up or down together.
 9         232. Today, three entities are responsible for Cardano: (1) the Cardano
10   Foundation, a Swiss entity that is the legal custodian of the Cardano protocol and
11   owner of its brand; (2) IOHK, an engineering company controlled by Hoskinson and
12   Wood responsible for designing, building, and maintaining the Cardano blockchain;
13   and (3) Emurgo, an entity with offices in New York and California that, according to
14   its website, is “essentially the for-profit arm of Cardano,” endeavoring “to advance
15   the platform and drive adoption through commercial ventures.” As explained on the
16   Cardano website, “IOHK develops the technology, the Cardano Foundation is
17   responsible for supervising development and promoting Cardano, while Emurgo
18   drives commercial adoptions.” These three entities collectively received 5.2 billion
19   ADA following the initial mining of ADA, or approximately 16.7% of the initial
20   token supply of 31.1 billion ADA.
21         233. These three entities have used the proceeds from ADA sales to fund the
22   development, marketing, business operations, and growth of the Cardano protocol.
23   For example, investor funds were used to enact the Cardano Roadmap created by
24   IOHK—specifically, to develop each of the Cardano development “eras” as shown in
25   the following screenshot from the Cardano website:
26
27
28
       COMPLAINT                                  42
               Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 43 of 90

 1
 2
 3
 4
 5
 6         234. Kraken has made ADA available for buying, selling, and trading on the
 7   Kraken Trading Platform and through the Kraken Services since approximately
 8   September 2018.
 9         235. The information publicly disseminated by Cardano, IOHK, and Emurgo
10   would lead a reasonable investor, including those who purchased ADA since
11   September 2018, to view ADA as an investment. Specifically, investors would
12   reasonably expect to profit from holding ADA based on the efforts of these groups to
13   grow the Cardano platform because this growth would in turn increase the demand
14   for and the value of ADA.
15         236. In public statements on Twitter and other social media, as well as on
16   their respective websites, including statements made while ADA was available to
17   trade on the Kraken Trading Platform and through the Kraken Services, the Cardano
18   Foundation, IOHK, and Emurgo have touted their expertise in developing blockchain
19   networks and described the efforts they have made and will continue to make to
20   develop the Cardano protocol and blockchain and attract users to the technology.
21   These statements include:
22                (a)    an “ask me anything” video stream posted by Charles Hoskinson
23   at IOHK in or about October 2018 in which he answered questions posed by the live
24   public audience and in which he stated that he believes ADA will achieve his goal of
25   a future market capitalization of $1 trillion;
26                (b)    a blog post by Charles Hoskinson at IOHK in or around January
27   2020 about how the decade from 2020 to 2029 will be the decade of Cardano and
28   which stated, “[a]s we exit 2020 and throughout the next decade, incentives will be a
      COMPLAINT                                  43
               Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 44 of 90

 1   source of continuous research. The better we get, the faster the feedback loop
 2   becomes, the faster we can grow to achieve a billion users and become a truly global
 3   social operating system that is beneficial to everyone. With all that being said,
 4   commercialization, technology, and incentives are the three things that will need to be
 5   aligned for us to achieve that coveted number one spot. We are building Cardano for
 6   a reason…it is a commercial project and we want to see it grow”;
 7                (c)   an announcement by IOHK in or around September 2021 about
 8   the creation of smart contracts on the protocol, which supposedly would “pav[e] the
 9   way” for additional demand for the blockchain protocol;
10                (d)   a blog post by IOHK in or around November 2022 describing its
11   efforts to introduce “innovations, new functionality, and new features” to the
12   blockchain; and
13                (e)   a blog post by IOHK on or around November 17, 2022, touting
14   ADA being “hosted on more than 30 cryptocurrency exchanges,” and outlining
15   IOHK’s plans to “improv[e] the underlying performance of the Cardano network to
16   better support growth and adoption of thousands of applications with high transaction
17   volumes” while giving specific examples of how this would be achieved.
18         237. Public statements made by Kraken to investors about ADA and the
19   Cardano Platform reinforced investors’ reasonable expectation of profits from an
20   investment in ADA due to the managerial efforts of Cardano, IOHK, and Emurgohas.
21         238. For example, on its website, Kraken describes for investors Cardano’s
22   history, team, and development. Specifically, Kraken’s website states that:
23         A team of experts in the [crypto asset] and blockchain technology industries
           created Caradano (ADA), led by Jeremy Wood and Charles
24         Hoskinson…Together, Wood and Hoskinson formed Input Output Hong
           Kong (IOHK), the research and development company behind Cardano….
25         The Cardano Foundation is a non-profit organization based in Switzerland
           that oversees the development and adoption of Cardano. It promotes the
26         use and development of Cardano, provides education and resources, and
           governs the Cardano ecosystem . . . . A for-profit investment arm called
27         Emurgo provides support to prospective Cardano developers and promotes
           the business integration of Cardano’s blockchain services.
28
       COMPLAINT                                   44
                 Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 45 of 90

 1                 2.    ALGO
 2         239. Algorand is a blockchain protocol founded by Silvio Micali. The
 3   Algorand blockchain uses a consensus algorithm it calls “pure proof-of-stake,” in
 4   which each user’s ability to influence the choice of a new block is proportional to its
 5   stake (number of tokens) in the system.
 6         240. “ALGO” is the native token of the Algorand blockchain, and has a
 7   maximum supply of 10 billion ALGO minted at the launch of the Algorand network.
 8   Because ALGO is the native token of the Algorand blockchain, those utilizing the
 9   Algorand blockchain need to hold (and potentially stake) certain amounts of ALGO.
10         241. From the time of its offering and continuing through the Relevant
11   Period, ALGO was offered and sold as an investment contract and is therefore a
12   security.
13         242. The price of all ALGO tokens goes up or down together.
14         243. The Algorand Foundation Ltd. conducted an initial ALGO token sale on
15   or about June 19, 2019, selling 25 million tokens at $2.40 per ALGO, raising
16   approximately $60 million. In advance of the token sale, the Algorand Foundation
17   promoted the token sale on Twitter and included a link to its website.
18         244. The Algorand Foundation promoted the June 19, 2019, token sale in part
19   with a refund policy that allowed ALGO investors to return the ALGO to the
20   Algorand Foundation one year later at 90% of the original purchase price. The
21   Algorand Foundation explained the economic rationale behind the refund policy by
22   noting its own belief in and commitment to the value of ALGO, stating: “We believe
23   in the underlying value of the Algorand blockchain, the Algo, and the potential of the
24   borderless economy. Our goal is to invest in the growth, sustainability and
25   performance of that economy.”
26         245. In promoting the ALGO token sale, the Algorand Foundation tied the
27   potential growth of the Algorand blockchain to potential demand for the ALGO token
28   itself, and to its own commitment to preserving a price floor for ALGO.
        COMPLAINT                                 45
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 1         246. In or around August 2019, the Algorand Foundation publicly offered
 2   ALGO investors an early refund opportunity, and ALGO investors returned a total of
 3   approximately 20 million ALGO tokens to the Algorand Foundation in exchange for
 4   a refund that was 85% of the original purchase price. In or around June 2020, ALGO
 5   investors who did not refund their ALGO tokens in August 2019 were publicly
 6   offered a second refund window. ALGO investors returned a total of approximately 5
 7   million ALGO tokens for a refund that was 90% of the original purchase price.
 8         247. Through its rewards programs and incentive structures, the Algorand
 9   Foundation continued distributing tokens after the June 2019 token sale. As of
10   September 2022, approximately 6.9 billion ALGO were in circulation.
11         248. Today, ALGO is available for buying, selling, and trading on crypto
12   asset trading platforms in exchange for fiat currency or certain crypto assets,
13   including bitcoin. Kraken made ALGO available for buying, selling, and trading on
14   the Kraken Trading Platform and through the Kraken Services in January 2020.
15         249. From the time of its offering and continuing through the Relevant
16   Period, ALGO was offered and sold on the Kraken Trading Platform and through the
17   Kraken Services as an investment contract and is therefore a security.
18         250. Today, two entities are responsible for Algorand: (1) the Algorand
19   Foundation, an organization purportedly focused on Algorand “protocol governance,
20   token dynamics and supporting grassroots, open-source development on the Algorand
21   ecosystem,” which was incorporated in Singapore; and (2) Algorand, Inc., a company
22   purportedly focused on “layer-1 development of the Algorand Protocol and enabling
23   Enterprise adoption of Algorand blockchain technology.”
24         251. The Algorand Foundation and Algorand, Inc. purportedly collaborate on
25   projects and initiatives for the Algorand community.
26         252. Shortly before the June 19, 2019, ALGO token sale, Steven Kokinos, the
27   CEO of Algorand, Inc., posted a publicly available article stating: “(a) We will be
28   holding our founder’s tokens for the long term and will not be selling them. (b) We
       COMPLAINT                                  46
               Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 47 of 90

 1   will use our founder’s tokens to participate in consensus and assist in securing the
 2   network, though we will never represent more than 49% of the voting. (c) We will
 3   use our founder’s tokens to support the ecosystem and encourage development.”
 4         253. The Algorand Foundation purportedly owns 500 million ALGO tokens
 5   and the participation and governance rewards associated with those tokens. Also,
 6   members of the Algorand Foundation’s board of directors and its advisory
 7   committees receive ALGO as compensation.
 8         254. In addition to the tokens it owns, as of September 2022, the Algorand
 9   Foundation also controls over 3 billion ALGO tokens in wallets publicly identified as
10   for “Community & Governance Rewards,” “Ecosystem Support,” and “Foundation
11   Endowment,” signaling to the public that the Algorand Foundation would use the
12   ALGO tokens to support the ALGO economy or ecosystem as well as to reward itself
13   and participants in this ecosystem.
14         255. The information publicly disseminated by Algorand, Inc. and the
15   Algorand Foundation would lead a reasonable investor, including those who
16   purchased ALGO since January 2020, to view ALGO as an investment. Specifically,
17   investors would reasonably expect to profit from holding ALGO based on the efforts
18   of these groups to grow the Algorand blockchain and the technologies associated with
19   it because this growth would in turn increase the demand for and the value of ALGO.
20         256. In public statements on Twitter, as well as on their respective websites,
21   Algorand, Inc. and the Algorand Foundation promote the Algorand protocol.
22         257. Until approximately May 14, 2022, the Algorand Foundation promoted
23   that ALGO investors could receive participation rewards (purportedly a form of
24   staking by delegation) by “participation in the Algorand ecosystem via holding Algo
25   in an online wallet.”
26         258. As of approximately May 14, 2022, the Algorand Foundation publicly
27   stated that it would replace the participation rewards that ALGO holders were entitled
28   to receive with so-called governance rewards. The Algorand Foundation described
       COMPLAINT                                 47
               Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 48 of 90

 1   “Governance” as a way for investors to make investment returns on their ALGO
 2   purchases—stating it is “a decentralized program which allows Algo holders to vote
 3   on the future of Algorand” and “the best way to earn rewards for holding Algo, with
 4   APY% of 10.02% - 14.05% seen in previous periods.”
 5         259. The Algorand, Inc. and Algorand Foundation websites tout their teams’
 6   technical experience and expertise in the areas of cryptography and business
 7   development. For example, Algorand, Inc.’s website states: “Blending technical
 8   mastery and professional stability, the Algorand team consists of internationally
 9   recognized researchers, mathematicians, cryptographers, and economists along with
10   proven business leaders from global technology companies.”
11         260. In a March 2022 report, the Algorand Foundation publicly stated that it
12   had started a new program to incentivize the “growth of the ecosystem, which is the
13   fundamental need of a maturing blockchain. The program includes a series of loans
14   to help the growth of our DeFi network and to expand the institutional investments in
15   the ecosystem . . . . The Algorand Ecosystem team facilitates the development and
16   growth of the ecosystem and developer pipeline including undiluted funding,
17   technical onboarding and standardization conventions for ASAs, Wallets and AVM.”
18         261. Algorand, Inc. and the Algorand Foundation also take steps to
19   incentivize third parties to participate in and attract users to the ALGO protocol. For
20   example, in or around February 2022, the Algorand Foundation announced a $10
21   million incentive for developers that could make the Algorand blockchain compatible
22   with applications built on the Ethereum blockchain.
23         262. Also in or around February 2022, the Algorand Foundation announced a
24   section of its website called AlgoHub, “a virtual community designed to grow the
25   pipeline of #Algorand developers.”
26         263. These statements led reasonable ALGO investors throughout the
27   Relevant Period to expect that the demand for ALGO would likely increase based on
28   Algorand, Inc.’s and Algorand Foundation’s efforts to increase demand for the
      COMPLAINT                                 48
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 1   Algorand technology, thereby resulting in a price increase for ALGO.
 2         264. Public statements made by Kraken to investors about ALGO and the
 3   Algorand blockchain reinforced investors’ reasonable expectation of profits from an
 4   investment in ALGO due to the managerial efforts of Algorand, Inc. and the
 5   Algorand Foundation.
 6         265. For example, on its website, Kraken provides investors with analysis
 7   about the price of ALGO. Specifically, Kraken’s website states:
 8         Algorand is a new public blockchain, meaning its technology, while novel,
           has not yet seen much testing under real-world market conditions….
 9         Investors may also see Algorand as a viable part of a cryptocurrency
           portfolio should they believe that proof-of-stake blockchains, which lower
10         the cost of participating in a blockchain’s operation, will ultimately prove
           more successful in the market.
11
12                3.    ATOM
13         266. “ATOM” is the native crypto asset of the Cosmos Hub. The Cosmos
14   project was launched in 2017 by Jae Kwon and Ethan Buchman. According to the
15   Cosmos website (https://cosmos.network), Cosmos is an ecosystem of blockchains
16   designed to scale and interoperate with each other, and the Cosmos team aims to
17   “create an Internet of Blockchains” or “a network of blockchains able to
18   communicate with each other in a decentralized way.”
19         267. Cosmos is built on a proof-of-stake consensus mechanism.
20         268. The Cosmos Hub is a central blockchain that provides services to other
21   blockchains connected to it, including “the largest interchain token exchange, shared
22   security through interchain security, bridges to ethereum (ETH) and bitcoin (BTC),
23   and secure custodianship of digital assets.” Cosmos described the Cosmos Hub as
24   “the first hub among many hubs that [w]as launched within the Cosmos Network of
25   sovereign blockchains.”
26         269. ATOM is described as “a license for the holder to vote, validate, or
27   delegate to other validators” and “can also be used to pay for transaction fees to
28   mitigate spam.”
       COMPLAINT                                   49
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 1         270. In 2017, the Interchain Foundation (the “ICF”), a Swiss non-profit
 2   organization of which Buchman is President, sold ATOM by conducting what it
 3   termed the “Cosmos Fundraiser.” These so-called “donations” were to be used for
 4   the development of the Cosmos network. Pursuant to this offering, participants
 5   received ATOM tokens in exchange for Bitcoin or Ethereum tokens. The ICF offered
 6   ATOM at a value of $0.10 per token, with a 25 percent discount on that price for
 7   partnering “strategic funders” and a 15 percent discount for individual “Pre-
 8   Fundraisers.” By April 2017, ICF had raised approximately $17.3 million in BTC
 9   and ETH through its “fundraiser” by selling ATOM tokens.
10         271. From the time of its offering and continuing through the Relevant
11   Period, ATOM was offered and sold as an investment contract and therefore a
12   security.
13         272. The price of all ATOM tokens goes up or down together.
14         273. At least four entities are currently or have been significantly involved in
15   the development of Cosmos: (1) the ICF, which was created in 2017 by Kwon and
16   Buchman and was formed “to support the development of Cosmos and the ecosystem
17   that will contribute to the Cosmos Network”; (2) Interchain GmbH, LLC, a German
18   limited liability company and subsidiary of ICF, which employs a team of
19   approximately 35 software engineers and operations personnel working primarily on
20   the Cosmos network; (3) All in Bits, Inc. d/b/a Tendermint (n/k/a Ignite, Inc.)
21   (“Tendermint”), a Delaware corporation created by Kwon and headquartered in
22   Berkley, California, with which the ICF contracted in 2017 “to develop the initial
23   portion of the CESS [Cosmos Essential Software and Services]”; and (4)
24   NewTendermint, Inc., a Delaware corporation of which Kwon is CEO and which
25   supports and develops the Cosmos ecosystem.
26         274. In February 2022, NewTendermint was spun off from All in Bits, Inc.
27   (d/b/a Tendermint), which was rebranded to and became Ignite, Inc. Ignite has
28   focused on developing products and developing tools “to onboard the next wave of
       COMPLAINT                               50
               Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 51 of 90

 1   developers and crypto enthusiasts to Cosmos.”
 2         275. ATOM has been available for buying, selling, and trading on the Kraken
 3   Trading Platform and through the Kraken Services since April 2019.
 4         276. The information publicly disseminated by ICF, Kwon, and Buchman
 5   would lead a reasonable investor, including those who purchased ATOM since April
 6   2019, to view ATOM as an investment. Specifically, ATOM holders would
 7   reasonably expect to profit from the efforts of these entities to grow the Cosmos
 8   protocol because this growth would in turn increase the demand for and value of
 9   ATOM.
10         277. The ICF collected and pooled the $17.3 million raised from investors in
11   the Cosmos Fundraiser. In promoting the Cosmos Fundraiser, the ICF represented
12   that the funds raised would be deployed to develop the Cosmos network. For
13   example, the March 31, 2017, “Cosmos Plan” posted on the Cosmos GitHub page
14   provided that the raised funds would be used “to contract with entities”—including
15   Tendermint—“and their agents for the development of the Cosmos Essential
16   Software and Services (CESS) and to help foster a community around CESS.” The
17   ICF later disclosed how they spent investor funds, posting “Projects Funded in 2018”
18   to the ICF’s public GitHub page.
19         278. In the 2017 Cosmos Whitepaper and “Fundraiser Plan” (both of which
20   were publicly available on the Cosmos website), Kwon and Buchman described the
21   Cosmos Fundraiser and said that the 236 million ATOM tokens initially minted
22   would be distributed as follows: 10% to the “Cosmos Network Foundation” (the
23   ICF), 10% to All in Bits, Inc. (Tendermint), 5% to initial or “lead donors,” and 75%
24   to “the donors of the Cosmos Fundraiser” (investors).
25         279. In public statements on the Cosmos and ICF websites, including
26   statements made and available during the period when ATOM was available to trade
27   on the Kraken Trading Platform, the ICF described its expertise in developing
28   blockchain networks. Further it detailed the efforts it and related entities, including
       COMPLAINT                                  51
               Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 52 of 90

 1   Interchain GmbH and Tendermint, were making to develop the Cosmos network and
 2   attract users to the technology. For example:
 3            (a) Cosmos’s website stated that “Cosmos is supported by the Interchain
 4               Foundation” and identifies Tendermint, Interchain GmbH, and 15 other
 5               “Cosmos core development teams.”
 6            (b) The ICF website stated that it “funds, stewards, and responsibly
 7               advances the Cosmos ecosystem” and that its “core teams maintain the
 8               protocols and applications” in the “Cosmos tech stack” (including
 9               Cosmos Hub and Cosmos SDK). Further, the site identified 35 “Team”
10               members, including Cosmos Hub and Cosmos SDK project, strategy,
11               and developer relations leads, and software and developer relations
12               engineers,” that “[w]e help support projects like the Cosmos Network.”
13               In describing the Team’s “Engineering and Product” work, the site said
14               “[w]e are primarily interested in general purpose technologies that
15               expand the environment, capabilities, and security of the Cosmos
16               ecosystem.”
17            (c) The “Projects Funded in 2018” post on the ICF’s GitHub page (posted in
18               2019) identified grants, service agreements, and investments to develop
19               the Cosmos network in 2018.
20            (d) The ICF website has touted the “Builders Program,” which “provides
21               mentorship, structured support and access to a wide network of partners”
22               and “is led by a team experienced in building the ecosystem’s software
23               and infrastructure.” The site has said the program “is made by builders
24               for builders, linking together our team of entrepreneurs, software
25               engineers and designers with years of experience in building and
26               launching chains” and is a vehicle for ICF to “help teams navigate the
27               ecosystem by giving access to our large network of investors, exchanges,
28             custodians, auditors, development and design agencies, data providers
       COMPLAINT                              52
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 1                and infrastructure partners.”
 2         280. Public statements made by Kraken to investors about ATOM and the
 3   Cosmos protocol reinforced investors’ reasonable expectation of profits from an
 4   investment in ATOM due to the managerial efforts of ICF, Kwon, and Buchman.
 5         281. For example, on its website, Kraken describes for investors ICF’s
 6   history, team, and development. Kraken also provides a link to the Cosmos
 7   “roadmap” for investors to “stay connected on the current development status of
 8   Cosmos” and directs investors to the “Cosmos blog” for regular updates from the
 9   “Cosmos team.”
10                4.    FIL
11         282. “FIL” is the native crypto asset of the Filecoin network. The Filecoin
12   network is an open-source data storage network that runs on a blockchain created by
13   Protocol Labs, Inc., which describes itself as a research, development, and
14   deployment lab for network protocols.
15         283. In or around July 2014, Protocol Labs and its founder and CEO, Juan
16   Batiz-Benet (“Benet”), published a whitepaper entitled “Filecoin: A Cryptocurrency
17   Operated File Storage Network,” which Protocol Labs updated approximately three
18   years later, setting forth a “path toward the construction of the Filecoin network.”
19         284. In 2017, Protocol Labs conducted a two-part token sale: first, an
20   “Advisor Sale” for advisors of Protocol Labs and Filecoin; and second, a “Public
21   Sale” for the broader community, supposedly limited to “accredited investors”
22   (collectively “2017 FIL Sales”). In these sales, investors could use U.S. dollars and
23   certain crypto assets to buy Filecoin.
24         285. Protocol Labs ran the Advisor Sale from July 21 to July 24, 2017, and
25   sold FIL to approximately 150 investors, which included individuals, institutional
26   investors, trusts, and established syndicate investors. These investors paid $.075 per
27   FIL and were offered “vesting/discount choices of 1-3 years and 0-30% discount.”
28        286. In the August 2017 Public Sale, the FIL price was set based on a “public
       COMPLAINT                              53
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 1   sale price function,” described as “price = max ($1, amountRaised / $40,000,000)
 2   USD/FIL” and increased thereafter based on the amount sold. For the Public Sale,
 3   like the Advisor Sale, investors received discounted pricing for agreeing to longer
 4   vesting periods.
 5         287. From the time of its offering and continuing through the Relevant
 6   Period, FIL was offered and sold as an investment contract and therefore a security.
 7         288. The price of all FIL tokens goes up or down together.
 8         289. In connection with the 2017 FIL Sales, which were effected pursuant to
 9   Simple Agreement for Future Tokens (SAFTs), Protocol Labs filed forms with the
10   SEC claiming an exemption from registration for the offerings of FIL pursuant to
11   SAFTs.
12         290. Protocol Labs reported that they raised more than $205 million for the
13   development of Filecoin in the 2017 FIL Sales and that the value of FIL increased in
14   the days following the close of the sale based on the fluctuation in value of certain
15   invested crypto assets.
16         291. Protocol Labs pooled investment proceeds from the token sales to fund
17   the development and growth of the Filecoin network.
18         292. On October 15, 2020, Protocol Labs launched the mainnet, a publicly
19   accessible version of the Filecoin network, and FIL began being minted and
20   distributed. There was a stated maximum circulating supply of 2,000,000,000 FIL,
21   meaning that no more than 2 billion FIL will ever be created, with issuance aligning
22   with network growth.
23         293. FIL has been available for buying, selling, and trading on the Kraken
24   Trading Platform and through the Kraken Services since October 2020.
25         294. Since the October 2020 launch, Protocol Labs has continued to use funds
26   from the sale of FIL to develop, expand, and promote the Filecoin network.
27         295. The information Protocol Labs has publicly disseminated, including after
28   the initial FIL sales, would lead a reasonable investor, including those who have
       COMPLAINT                                   54
               Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 55 of 90

 1   purchased FIL since October 2020, to view FIL as an investment. Specifically, FIL
 2   holders would reasonably expect to profit from Protocol Lab’s efforts to grow its
 3   protocol because this growth would in turn increase the demand for and value of FIL.
 4         296. The Protocol Labs Filecoin Team posted about the sale: “The Filecoin
 5   Sale was a critical milestone in the lifetime of the project. It raised the funding
 6   necessary to grow our team, to create the network, and build all the software tools
 7   needed to operate and use the network.” They further stated, “Filecoin success will
 8   reward the investment of supporters like you by simultaneously driving down the cost
 9   of storage and increasing the value of the Filecoin tokens that incentivize miners to
10   provide storage. We’re thrilled by your widespread, enthusiastic interest and look
11   forward to staying engaged and including you in our success.”
12         297. In addition, Benet and the Filecoin team released a document titled,
13   “Filecoin Token Sale Economics,” that provided information about the 2017 FIL
14   Sales and the Filecoin network, stating:
15         Protocol Labs requires significant funding to develop, launch, and grow the
           Filecoin network. We must develop all the software required: the mining
16         software, the client software, user interfaces and apps, network
           infrastructure and monitoring, software that third-party wallets and
17         exchanges need to support Filecoin, integrations with other data storage
           software, tooling for web application and dapps to use Filecoin, and much
18         more. We must deploy the network, facilitate its growth to large scale,
           market to and onboard miners and clients, bring key partners into the eco
19         system, and much more.
20         298. That document also stated that FIL was to be distributed to groups
21   “critical to the network’s creation, development, growth, and maintenance” with an
22   allocation that tied Protocol Labs’ profits to those of FIL holders:
23         (a) 70% to Filecoin Miners – “For providing data storage service, maintaining
24             the blockchain, distributing data, running contracts, and more.”
25         (b) 15% to Protocol Labs – “For research, engineering, deployment, business
26             development, marketing, distribution, and more.”
27         (c) 10% to investors – “For funding network development, business
28           development, partnerships, support, and more.”
       COMPLAINT                               55
                Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 56 of 90

 1         (d) 5% to Filecoin Foundation – “For long-term network governance, partner
 2             support, academic grants, public works, community building, etc.”
 3         299. The “Filecoin Token Sale Economics” document further explained: “We
 4   have structured the token sale to reward a large group of people that can help us build
 5   the [Filecoin] network, by selling Filecoin at what we think is a much lower price
 6   than it will be worth some day (caveat: as with any risky investment of course we
 7   cannot make guarantees or predictions).”
 8         300. As described in a July 2017 blog post, the Advisor Sale in particular was
 9   intended, in part, to secure “long-term commitment to and alignment with the
10   Filecoin network” and “to reward their contributions so far and/or future potential
11   with the capability to invest early.”
12         301. The “Filecoin Token Sale Economics” and another document made
13   available to investors ahead of the 2017 FIL Sales, the Filecoin Primer, stated that
14   Filecoin purchasers would be able to sell the token on crypto asset trading platforms
15   in the future.
16         302. The Filecoin Primer also touted “Large Scale Value Creation,”
17   explaining that the Filecoin Network: “will create value in a number of ways, and the
18   total impact of the network can be tremendous. Growth of the network will drive
19   demand for the token. The more value created by the Filecoin Network, the more
20   things people and organizations spend Filecoin on, and the greater the value and
21   worth of the token.”
22         303. Similarly, a Confidential Private Placement Offering Memorandum
23   (“PPM”) in connection with the 2017 FIL Sales stated: “A significant portion of the
24   proceeds of the Offering will be used by the Company to achieve the Minimum
25   Viable Product and subsequently to buildout a decentralized storage network,
26   powered by a blockchain and the Filecoin protocol token.”
27          304. Moreover, both before and after the 2017 FIL Sales, Protocols Labs
28   consistently touted its expertise and ability, and led the work to develop the Filecoin
       COMPLAINT                                     56
               Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 57 of 90

 1   network for launch. In an August 2, 2017 Q&A, Benet stated: “Over the last few
 2   years, Protocol Labs has proved to the world that we know how to deploy capital to
 3   create valuable projects, valuable technology, and valuable software. . . . We know
 4   how to deploy capital effectively. We have great plans for the Filecoin network and
 5   its surrounding ecosystem, at many levels of funding. We plan to deploy 100s of
 6   millions of dollars over the next few years to make Filecoin the world’s best storage
 7   network, not just the best decentralized storage network.”
 8         305. Benet also addressed the funding needs, pricing, and economics of FIL
 9   in that August 2017 Q&A, stating: “Since we think and are working for Filecoin to be
10   worth a lot more in the future, then we naturally want to sell it at the highest price the
11   market will bear. Subject to reason, if we can sell it higher, then we should.”
12         306. Benet also explained publicly that Filecoin needed funding in order to be
13   able to compete: “Our (collective) competition is the massive, centralized cloud
14   storage companies. We are talking about the tech titans – AWS, Google Cloud, and
15   Microsoft Azure – the three biggest companies in the world have cloud businesses
16   with BILLIONS of dollars in revenues, not just funding. In order to put up this fight,
17   we will need significant resources. Yes, resources in the hundreds of millions will
18   empower us to develop Filecoin as fast as we can, as well as the dozens of other tools
19   and services required to make Filecoin a service and ecosystem remotely close to
20   competitive with the centralized counterparts.”
21         307. The economic structure of FIL distribution and public statements about
22   that structure further invited investors to view FIL as an investment in Protocol Labs’
23   and the Filecoin Foundation’s efforts. These factors would lead reasonable investors
24   to conclude that FIL investors’ interests were aligned with those of FIL’s developers.
25   Specifically, the tokens allocated to Protocol Labs and Filecoin Foundation were to
26   vest over a six-year period beginning after the network launch. As stated in the
27   “Filecoin Token Sale Economics” document, Protocol Labs and the Filecoin
28   Foundation “aim[ed] to make Filecoin massively valuable in the long-term, and we
       COMPLAINT                               57
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 1   want to attract investors similarly interested in long-term value creation and growth”
 2   and “[v]esting creates long-term alignment” because “Protocol Labs and the Filecoin
 3   Foundation are deeply committed for the long-term, and 6-year vesting boldly proves
 4   that to all other network participants.”
 5         308. Filecoin has also implemented a process to “burn” (i.e., destroy) FIL
 6   tokens, thereby reducing the FIL supply. As with the “burn” mechanisms of other
 7   crypto asset securities, this marketed burning of FIL as part of the Filecoin’s
 8   economic features has led investors reasonably to view their purchase of FIL as
 9   having the potential for profit.
10         309. Following the release of the protocol in October 2020, Protocol Labs
11   continued to be heavily involved in the development and promotion of the Filecoin
12   network and its pursuit of success.
13         310. In late 2021, Raul Kripalani, a Protocol Labs researcher, introduced the
14   “Filecoin Virtual Machine” (“FVM”), described as a “core pillar in the next evolution
15   of the decentralized storage ecosystem.” On November 6, 2022, Kripalani tweeted,
16   “These were amazing weeks for the #FVM + team. Momentum and expectation are
17   through the roof. 100s of teams building on the Wallaby testnet. Many promising
18   @Filecoin apps to launch on mainnet the minute FEVM kicks in. Pumped to be
19   building the future of $FIL with these rockstars!” The Protocol Labs Twitter account
20   has posted updates regarding FVM, including through April 2023.
21         311. The Protocol Labs team has continued to release “roadmaps” or “master
22   plans,” available online and through recorded video presentations, that showcase
23   future development plans for the Filecoin network. For example, in September 2022,
24   Benet delivered the keynote address at FIL-Singapore, which “gathered builders from
25   around the world to build, share experiences, and hear from other community
26   members on what’s next for the network.” In his address, Benet presented “The
27   Filecoin Masterplan,” which included building the world’s largest decentralized
28   storage network.
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 1         312. In a February 3, 2023, Protocol Labs blog post addressing the impact of
 2   the “crypto winter” economic downturn, Benet touted the Filecoin team’s supposed
 3   successes to date in growing the Filecoin ecosystem, “[w]e’ve achieved a tremendous
 4   amount in the past several years - from Filecoin launch; to scaling IPFS to millions of
 5   users; building one of the fastest growing developer ecosystems; supporting 300+
 6   companies across the network; growing movements like SBS and FTC; launching
 7   testnets for FVM, Saturn, SpaceNet, and Bacalhau just last quarter; and much more.”
 8         313. Public statements made by Kraken about FIL and the Filecoin network
 9   reinforced investors’ reasonable expectation of profits from an investment in FIL due
10   to the managerial efforts of Protocol Labs.
11         314. For example, on its website, Kraken provides investors with analysis of
12   the price of FIL. Further, Kraken’s website states:
13         Should Filecoin be able to successfully offer decentralized storage service
           that can’t be easily tampered with by corporations or governments, it could
14         also gain more users, especially if centralized services begin to lose the trust
           of their customers. Like Bitcoin, the total amount of FIL that will ever be
15         created is also limited, in this case, to 2 billion tokens. If the Filecoin
           network grows and more users trust it with their data, and more miners
16         supply disk-space, then the amount of transactions requiring FIL should
           grow. The price of FIL should rise since the amount of FIL available is
17         limited.
18                5.    FLOW
19         315. FLOW is the native token for the Flow blockchain, which was launched
20   in 2020 by Dapper Labs, an entity incorporated in Canada. Flow was purportedly
21   designed as “the foundation for a new generation of games, applications, and the
22   digital assets that power them.”
23         316. The Flow website boasts that the Flow proof-of-stake blockchain is
24   designed in a manner that makes it different, faster, and more efficient than other
25   blockchain networks due to its “multi-node architecture,” which separates the
26   functions traditionally performed by one validator (collection, consensus, execution,
27   and verification) across multiple validator nodes.
28        317. Between 2019 and 2020, Dapper Labs raised approximately $24.6
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 1   million in “pre-launch” funding in two purportedly private fundraising rounds,
 2   including from venture capital firms, in return for convertible notes that were
 3   expected to convert to FLOW tokens. The FLOW tokens were subject to 24-month
 4   lock-up periods during which they could not be transferred, sold, or used in
 5   transactions.
 6         318. Subsequently, Dapper Labs held another token sale consisting of two
 7   phases, which raised approximately $19 million. Additionally, Dapper Labs
 8   conducted other sales of FLOW for which it filed forms with the SEC claiming that
 9   the sales were exempt from registration under Rule 506(b) of Regulation D, including
10   one on September 12, 2019 covering sales to 31 investors in the total amount of
11   approximately $11.2 million, and two others on December 9 and 15, 2021, each for
12   sales to a single investor in the amount of approximately $6.47 million and $23
13   million, respectively.
14         319. From the time of its offering and continuing through the Relevant
15   Period, FLOW was offered and sold as an investment contract and therefore a
16   security.
17         320. The price of all FLOW tokens goes up or down together.
18         321. Since approximately January 2021, FLOW has been available for
19   buying, selling, and trading on the Kraken Trading Platform and through the Kraken
20   Services.
21         322. According to the FAQ page on the Flow website: “[FLOW] is the
22   exclusive token for staking, delegating, paying transaction fees, and paying storage
23   fees. It is also the primary token used for buying, selling, and trading assets and
24   experiences on Flow.” Approximately 1.25 billion FLOW tokens were initially
25   created, and as of May 2023, approximately 72% of all FLOW is in circulation.
26         323. Given that FLOW tokens are required in order to interact with the Flow
27   blockchain, the demand for and the value of the FLOW token would increase as a
28   result of the efforts by Dapper Labs and the Flow development team to develop the
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 1   Flow blockchain network and increase demand for its features. The increase in value
 2   of FLOW would inure to all FLOW holders—investors and the Dapper Labs/Flow
 3   development team alike. Dapper Labs and the Flow development team have
 4   promoted this dynamic through the publicly available information they have
 5   disseminated.
 6         324. The information publicly disseminated by Dapper Labs and the Flow
 7   development team would lead a reasonable investor, including those who purchased
 8   FLOW since January 2021, to view FLOW as an investment. Specifically, FLOW
 9   holders would reasonably expect to profit from the efforts of these groups to grow the
10   Flow protocol because this growth would in turn increase the demand for and the
11   value of FLOW.
12         325. For example, Flow’s website stated that of the total FLOW supply,
13   Dapper Labs and the Flow development team collectively received 38%; pre-launch
14   backers and participants in the 2020 token sale received 30%; and 32% was set aside
15   for “ecosystem development” and remains under the control of Flow’s management.
16   This last group of tokens, according to the website, are used to “bootstrap adoption
17   and reward early participants in the network.”
18         326. Below is a graph depicting the initial or “Genesis Block” token
19   distribution of FLOW:
20
21
22
23
24
25
26
27
28
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 1
 2
 3
 4
 5
 6
 7
 8
 9
10
11
12
13
14
15         327. This stated distribution of FLOW tied the fortunes of FLOW holders to
16   each other and to the fortunes of the Flow development team.
17         328. Flow’s website further highlights its development team and its ability to
18   grow and develop the Flow blockchain and the value of the FLOW token. For
19   example, it states that Flow was “[d]eveloped by the team behind some of the most
20   successful crypto applications on the Ethereum network” and “Flow has been
21   developed and brought to market by one of the most innovative and interdisciplinary
22   teams in the world.”
23         329. Indeed, according to the Flow website, since the launch of the Flow
24   blockchain in or around December 2020, due to Dapper Labs’ and others’ efforts,
25   “Flow’s ecosystem has grown from a small group of enthusiasts to a global
26   community of over 10,000 developers, over 17 million user accounts, and over 2
27   million monthly active wallets.”
28        330. In addition, in its announcement of the Flow blockchain in or around
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 1   September 2019, Dapper Labs highlighted its involvement with other successful
 2   crypto projects and funding support it had received from various investors. And, at a
 3   2022 town hall, Dapper Labs and the Flow development team explained planned
 4   development activities for 2023, including continued development to support the
 5   consumer-scale adoption of blockchain technology.
 6         331. Further, the Flow website describes the FLOW token as a “low-
 7   inflation” asset—meaning that the only new tokens that would purportedly be issued
 8   would be distributed to stakers of the token so that FLOW investors’ holdings would
 9   not be diluted.
10         332. Public statements made by Kraken to investors about FLOW and the
11   Flow protocol reinforced investors’ reasonable expectation of profits from an
12   investment in FLOW due to the managerial efforts of Dapper Labs and the Flow
13   development team.
14         333. For example, on its website, Kraken describes FLOW’s history, team,
15   and development. Specifically, Kraken’s website states that “[w]ith Flow, the
16   team…is seeking to create a new platform that allows these types of applications to
17   attract a larger number of mainstream users. For more regular updates from the Flow
18   team, you can bookmark the Flow blog, which includes tips and tutorials on the
19   network and its evolving technology.”
20         334. Kraken’s website also provides investors with analysis about the price of
21   FLOW. Further, Kraken’s website states that, “[i]nvestors may also seek to add
22   FLOW to their portfolio should they believe in the future of blockchain platforms
23   focused on game development and collectables.”
24                6.     ICP
25         335. “ICP,” previously called “DNF” and rebranded as ICP in 2021, is the
26   native token of the “Internet Computer Protocol,” a blockchain-based protocol,
27   conceived in 2016 by Swiss not-for-profit DFINITY Foundation (“DFINITY”),
28   which has offices in Palo Alto and San Francisco.
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 1         336. DFINITY describes the Internet Computer Protocol as a set of protocols
 2   that allow independent data centers around the world to band together and offer a
 3   decentralized alternative to the current centralized internet cloud providers and ICP as
 4   the token designed to interact with these systems, including to provide for processing
 5   power, data storage, and network bandwidth.
 6         337. In an April 8, 2017, Medium post, DFINITY’s founder, Dominic
 7   Williams, referred to the Internet Computer Protocol as an “intelligent decentralized
 8   cloud.” At a 2020 Blockchain conference, he further touted the protocol as a more
 9   efficient replacement for big tech cloud services, servers, databases, firewalls, VPNs,
10   and other services.
11         338. Between 2017 and 2018, DFINITY engaged in three funding rounds: (1)
12   a “Seed” round in 2017; (2) a “Strategic” round in early 2018; and (3) a “Presale”
13   round in late 2018. In these rounds, DFINITY raised the equivalent of approximately
14   $170 million by selling rights to receive future ICP tokens, which did not yet exist.
15         339. According to a post released by DFINITY on its website on or about
16   May 10, 2021, when the network launched, the rights to “access” the ICP received in
17   the seed round funds were staggered from 0 to 90-plus days. On or about November
18   19, 2022, Williams tweeted that purchasers in the initial Seed fundraiser “made out
19   like bandits” when they purchased ICP for $0.03.
20         340. ICP tokens first became available on multiple crypto asset trading
21   platforms on or about May 10, 2021, when the network launched. At launch,
22   DFINITY minted a total of 469 million ICP tokens.
23         341. From the time of its offering and continuing through the Relevant
24   Period, ICP was offered and sold as an investment contract and therefore a security.
25         342. The price of all ICP tokens goes up or down together.
26         343. Since approximately March 2022, ICP has been available for buying,
27   selling, and trading on the Kraken Trading Platform and through the Kraken Services.
28        344. The information publicly disseminated by DFINITY and its founder
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 1   would lead a reasonable investor, including those who purchased ICP since March
 2   2022, to view ICP as an investment. Specifically, ICP holders would reasonably
 3   expect to profit from the efforts of these entities to grow the Internet Computer
 4   Protocol because this growth would in turn increase the demand for and the value of
 5   ICP.
 6          345. For example, DFINITY stated publicly that it would use the proceeds
 7   from ICP sales to fund development, marketing, business operations, and growth and
 8   promotion of the Internet Computer Protocol, and thus demand for its ICP token. In
 9   fact, DFINITY distributed approximately 24% of the ICP tokens issued in the public
10   launch to support the Internet Computer platform and to pay staking rewards through
11   the Internet Computer ecosystem. Another 18% of ICP tokens were distributed to
12   compensate the DFINITY team members, aligning their financial fortunes with those
13   of ICP investors.
14          346. Moreover, in an April 4, 2018 Medium post leading up to the 2018
15   funding rounds, Williams touted: “DFINITY has received inbound interest from
16   hundreds of private accredited entities such as hedge funds.” Indeed, a number of
17   venture capital firms invested in ICP.
18          347. Furthermore, from ICP’s inception through today, DFINITY has
19   publicly stated that its key developers, including Williams, have been and continue to
20   be heavily involved in Internet Computer Protocol and have promoted their
21   dedication to grow the network and increase the value of ICP.
22          348. For example:
23             • On June 27, 2020 Williams tweeted: “[t]he Internet Computer proj is
24                propelled by extraordinary investments in R&D. DFINITY has
25                assembled one of the strongest science & engineering teams in tech,
26                across several research centers worldwide. This team has been
27                relentlessly pushing blockchain ambition to new levels.”
28           • On December 19, 2021, Williams tweeted: “[t]here’s nothing we can do
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 1                to control the price, but we feel the pain same as everyone else. There
 2                has been a lot of market manipulation by bad people but we remain
 3                focused on taking #ICP to the #1 spot.”
 4             • On January 25, 2023, Williams tweeted: “[w]hen I look at [crypto asset
 5                pricing services], I don’t look at the $ price, I look position. $ICP needs
 6                to be in the top 3, and I will work tirelessly to help get it there.”
 7         349. A month after it was launched for public trading, ICP’s price reached an
 8   intraday high of $700. One month later, the price of ICP had plummeted to $72 and
 9   Williams began making public statements indicating the price of ICP would increase
10   again. For example, on June 10, 2021, Williams tweeted, “Major [venture capital]
11   firms … hv [sic] long-term strategies & generally don’t panic dump. Their focus is
12   on moonshots because that’s what generates their primary returns. We all need to
13   keep our focus on horizon. Watch what happens in +6/9 months.” And, on
14   September 3, 2021, Williams tweeted, “ICP seed investors’ 2000X gains; crypto’s
15   largest research org; most advanced blockchain; ferocious growth.”
16         350. In an ICP whitepaper released in January 2022, DFINITY promotes that
17   it burns ICP tokens as a mechanism to support the price of ICP by reducing their total
18   supply. On January 20, 2023, Williams tweeted, “$ICP will eventually become
19   deflationary”—meaning its supply will be reduced over time. On its website,
20   DFINITY posts a Dashboard that calculates the ongoing cycle burn rate, reflecting
21   the number of ICP tokens burned. As with other crypto asset securities set forth
22   herein, this marketed burning of ICP as part of the system’s “deflationary”
23   mechanism has led investors reasonably to view their purchase of ICP as having the
24   potential for profit by limiting the supply of tokens available.
25         351. Public statements made by Kraken about ICP and the Internet Computer
26   Protocol reinforced investors’ reasonable expectation of profits from an investment in
27   ICP due to the managerial efforts of DFINITY.
28        352. For example, on its website, Kraken describes for investors DFINITY’s
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 1   history, team, and the development of the Internet Computer Protocol. Further,
 2   Kraken provides investors with analysis about the price of ICP. Specifically,
 3   Kraken’s website states: “Investors may find Internet Computer attractive based on
 4   its goal of creating a blockchain platform for faster transaction settlement time and
 5   with theoretically infinite capacity.” Kraken website further states: “ICP’s goal of
 6   building a modern internet with the ability to host any scale of application, from DeFi
 7   and smart contract applications to tokenized internet services and websites, may also
 8   be of interest to those who want to add ICP to their portfolio.”
 9                 7.    MANA
10         353. “MANA” is the digital token minted by Decentraland. Decentraland is a
11   virtual reality platform that began development in June 2015 but was not made
12   available to the public until its launch in February 2020. Decentraland was launched
13   through an entity named Metaverse Holdings by a team of core individual developers:
14   Ariel Meilich, Esteban Ordano, Manual Araoz, and Yemel Jardi. Decentraland
15   operates on the Ethereum blockchain. According to Decentraland’s website,
16   www.decentraland.org, Decentraland is a three-dimensional virtual reality platform,
17   where users can create, experience, and monetize their content and applications.
18         354. According to Decentraland’s website, MANA serves as the crypto asset
19   involved in all transactions in the Decentraland virtual reality ecosystem. On August
20   18, 2017, Decentraland held an initial coin offering in which MANA tokens were
21   exchanged for ETH tokens, raising approximately $24.1 million. Currently, there is a
22   total supply of approximately 2.19 billion MANA tokens.
23         355. Decentraland offered early contributors to the Decentraland ecosystem a
24   discounted price when purchasing MANA.
25         356. From the time of its offering and continuing through the Relevant
26   Period, MANA was offered and sold as an investment contract and therefore a
27   security.
28        357. The price of all MANA tokens goes up or down together.
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 1         358. MANA has been available for buying, selling, and trading on the Kraken
 2   Trading Platform and through the Kraken Services since December 2020.
 3         359. The information Decentraland publicly disseminated would lead a
 4   reasonable investor, including those who have purchased MANA since August 2020,
 5   to view MANA as an investment. Specifically, MANA holders would reasonably
 6   expect to profit from Decentraland’s efforts to grow the Decentraland protocol
 7   because this growth would in turn increase the demand for and value of MANA.
 8         360. Investor proceeds raised during the MANA ICO were pooled to fund the
 9   marketing, business expenses, and completion of the Decentraland platform. For
10   instance, on July 5, 2017—a few weeks before the MANA ICO—Jardi published a
11   blog post detailing Decentraland’s intended use of revenue from the token sale as
12   follows:
13
14
15
16
17
18
19
20
21         361. The blog post further explained that the “top priority” for use of the
22   revenue was to develop a virtual world and that even after Decentraland was created,
23   “the development budget will focus on the continued improvement of the end-user
24   experience within the world.”
25         362. Indeed, Meilich explained in a separate blog post that after the ICO,
26   Decentraland would implement a “Continuous Token Model,” where it would
27   increase the MANA supply by 8 percent in the first year, followed by a lower rate in
28   subsequent years, to allow Decentraland to “regularly expand while accommodating
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 1   new users … The proceeds of the tokens sold by [the Continuous Token Model] will
 2   finance Decentraland over the long haul, perpetually aligning it with the prosperity of
 3   the network.”
 4         363. In April 2020, the Decentraland Team announced the creation of the
 5   Decentraland Foundation (the “Foundation”), which today holds the intellectual
 6   property rights over and makes available the products and services, including virtual
 7   environment and tools, offered on the Decentraland platform. Meilich publicly stated
 8   that the distribution of the initial supply of MANA tokens issued at the time of the
 9   ICO would be as follows: 20 percent to the founding team, advisors, and early
10   contributors; 20 percent to the Foundation; 40 percent to be available for purchase by
11   the public; and 20 percent reserved to “incentivize early users, developers, and
12   partners who want to build within Decentraland.”
13         364. As Meilich explained in his public blog post, “To incentivize value
14   creation within Decentraland, extra tokens will be allocated to the [development
15   team], organization, and a reserve to accelerate Community and Partner engagement.”
16         365. For example, Decentraland publicly issued a whitepaper (“Decentraland
17   Whitepaper”) describing the architecture that would be built in the virtual reality
18   platform and steps that would be taken to support Decentraland’s growth. It further
19   made clear that the development of the platform was only beginning, and listed a
20   number of “Challenges” that would need to be addressed in the development process
21   in order for the platform to succeed.
22         366. Decentraland has continued to invest efforts in new developments and
23   tools for the platform. According to Melich, even after the ICO, Decentraland was
24   still “preparing a land allocation policy to ensure fair distribution, as well as a method
25   for groups to purchase larger contiguous plots of land.” Since the ICO, Decentraland
26   has developed tools for purported use on its platform (e.g., the “Marketplace” and
27   “Builder” tools). In a public blog post published on March 19, 2018, the
28   Decentraland team described the marketplace tool as the “first … in what will be a
      COMPLAINT                                69
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 1   series of tools.”
 2         367. Additionally, the Decentraland Whitepaper explained how the
 3   Foundation would “Foster the Network” in that it will “hold contests to create art,
 4   games, applications, and experiences, with prizes contingent on meeting a set of
 5   milestones. At the same time, new users will be assigned allowances, allowing them
 6   to participate in the economy immediately.” The Decentraland Whitepaper further
 7   claimed, “These financial incentives will help bootstrap the utility value of the
 8   network until it independently attracts users and developers.”
 9         368. The Decentraland Whitepaper and website have also marketed that the
10   protocol “burns” (or destroys) MANA tokens when used within the Decentraland
11   ecosystem.
12         369. Public statements made by Kraken about MANA and the Decentraland
13   Foundation reinforced investors’ reasonable expectation of profits from an
14   investment in MANA due to the managerial efforts of Decentraland.
15         370. For example, on its website, Kraken describes for investors MANA’s
16   history, team, and development. Further, Kraken provides investors with analysis
17   about the price of MANA. Specifically, Kraken’s website states: “When LAND is
18   auctioned, the MANA tokens used to purchase the parcels are burned, or removed
19   from circulation, making the supply of MANA deflationary. This could put pressure
20   on the token value as the platform grows with new users.” “Investors may seek to
21   add MANA to their portfolio should they believe in the future of virtual reality and its
22   ability to connect users all over the world.”
23                8.     MATIC
24         371. “MATIC” is the native token of the Polygon blockchain. Polygon,
25   originally called the Matic Network and rebranded as Polygon in 2021, is a
26   blockchain platform created in 2017 in Mumbai, India by, among others, Jaynti
27   Kanani, Sandeep Nailwal, and Anurag Arjun. Since its creation, Polygon’s founders
28   have remained actively involved with Polygon through “Polygon Labs” (“Polygon”),
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 1   an entity they also founded for “the development and growth of Polygon.”
 2         372. According to the Polygon website, https://polygon.technology/, the
 3   Polygon network is an Ethereum scaling platform that enables developers to build
 4   scalable user-friendly dApps with low transaction fees, purportedly by hosting
 5   “sidechains” that run alongside the Ethereum blockchain, and allows users to process
 6   transactions and initiate the transfer of assets and technology development on
 7   Polygon’s supposedly less congested sidechain network.
 8         373. Polygon issued a fixed supply of 10 billion MATIC tokens. MATIC
 9   holders can earn additional MATIC for staking their MATIC on the Polygon platform
10   and becoming a validator, from delegating their MATIC to other validators in return
11   for a portion of the fees collected from validating transactions, or from staking their
12   MATIC with other third parties, such as crypto asset platforms that offer staking
13   services.
14         374. According to the initial whitepaper for MATIC, “Matic Tokens [we]re
15   expected to provide the economic incentives … of the Matic Network [now Polygon]
16   … [W]ithout the Matic Token, there would be no incentive for users to expend
17   resources to participate in activities or provide services for the benefit of the entire
18   ecosystem on the Matic Network.”
19         375. In or around 2018, Polygon sold approximately 4 percent of the total
20   supply of MATIC in two early rounds of sales raising $165,000 at a price of
21   $0.00079 USD per 1 MATIC and $450,000 at a price of $0.00263 USD per 1
22   MATIC. In April 2019, Polygon sold another 19% of the total supply of MATIC to
23   the public through a so-called “initial exchange offering” (or “IEO”—essentially, an
24   initial offer and sale of a crypto asset security on a crypto trading platform) on the
25   Binance.com crypto asset trading platform at a price of $0.00263 USD per 1 MATIC,
26   raising an additional $5 million to fund development of the network.
27         376. From the time of its offering and continuing through the Relevant
28   Period, MATIC was offered and sold as an investment contract and therefore a
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 1   security.
 2         377. The price of all MATIC tokens goes up or down together.
 3         378. MATIC has been available for buying, selling, and trading on the
 4   Kraken Trading Platform and through the Kraken Services since May 2021.
 5         379. The information Polygon publicly disseminated would lead a reasonable
 6   investor, including those who purchased MATIC since May 2021, to view MATIC as
 7   an investment. Specifically, MATIC holders would reasonably expect to profit from
 8   Polygon’s efforts to grow the Polygon protocol because this growth would in turn
 9   increase the demand for and the value of MATIC.
10         380. For example, Polygon stated publicly, including in the whitepaper, that it
11   would pool investment proceeds through its private and public fundraising to develop
12   and grow its business.
13         381. Following the IEO, moreover, Polygon engaged in additional MATIC
14   sales, stating publicly that it was doing so in order to raise the funds needed to
15   support the growth of its network. On February 7, 2022, Polygon reported on its blog
16   that it raised about $450 million through a purportedly private sale of its native
17   MATIC token in a funding round to several prominent venture capital firms. Polygon
18   reported, “[w]ith this warchest, the core team can secure Polygon’s lead in paving the
19   way for mass adoption of Web3 applications, a race that we believe will result in
20   Ethereum prevailing over alternative blockchains.”
21         382. Polygon has also reported fundraising from other marquee and celebrity
22   investors.
23         383. Polygon also stated that it would reserve roughly 67% of MATIC to
24   support the Polygon ecosystem, the Foundation, and network operations. Another
25   20% of MATIC was further reserved to compensate the Polygon team members and
26   advisors, aligning their fortunes with investors’ with respect to MATIC.
27         384. In addition, the Polygon blog provides frequent updates on network
28   growth and developments at Polygon, including weekly statistics on active wallets
       COMPLAINT                               72
               Case 3:23-cv-06003 Document 1 Filed 11/20/23 Page 73 of 90

 1   and transactions per day, as well as financial metrics such as revenue per day and
 2   total network revenue.
 3         385. Polygon has also routinely announced when crypto asset trading
 4   platforms have made MATIC available for trading, such as the Kraken Trading
 5   Platform and through the Kraken Services in or around May 2021.
 6         386. Polygon has explicitly encouraged MATIC purchasers to view MATIC
 7   as an investment in other ways. For example, in a February 5, 2021 tweet, 14 months
 8   after MATIC’s single biggest price drop, Nailwal compared the token to a prize
 9   fighter that came back from defeat to become a champion:
10
11
12
13
14
15
16         387. Also, on November 3, 2022, Nailwal stated on Twitter: “I will not rest
17   till @0xPolygon gets its well-deserved ‘Top 3’ spot alongside BTC & ETH. No other
18   project comes even close.” In a May 24, 2022 “Fireside Chat” with CNBC posted on
19   YouTube, Bejelic described part of “what’s different about Polygon” as: “[w]e are as
20   a team very, very committed, we have a very hands on approach with all the projects
21   out there, we are working around the clock on adoption and that is why we are
22   currently the most adopted scaling infrastructure platform.” Currently, the founders
23   of Polygon continue to promote the platform through various social media. For
24   example, on February 21, 2023, Nailwal tweeted, and Kanani retweeted, “Polygon
25   has grown exponentially. To continue on this path of stupendous growth we have
26   crystallized our strategy for the next 5 yrs to drive mass adoption of web3 by scaling
27   Ethereum. Our treasury remains healthy with a balance of over $250 million and
28   over 1.9 billion MATIC.”
       COMPLAINT                                  73
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 1         388. Since January 2022, Polygon has also marketed that it “burns” MATIC
 2   tokens accumulated as fees, indicating that the total supply of MATIC would
 3   decrease. For example, in January 2022, Polygon emphatically announced a protocol
 4   upgrade that enabled burning in a blog post titled, “Burn, MATIC, Burn!” As
 5   Polygon explained in another blog post on its website around the same time,
 6   “Polygon’s MATIC has a fixed supply of 10 billion, so any reduction in the number
 7   of available tokens will have a deflationary effect.” As of March 28, 2023, Polygon
 8   had burned approximately 9.6 million MATIC tokens. This marketed burning of
 9   MATIC as part of the Polygon’s network’s “deflationary effect” has led investors
10   reasonably to view their purchase of MATIC as having the potential for profit to the
11   extent there is a built-in mechanism to decrease the supply and therefore increase the
12   price of MATIC.
13         389. Public statements made by Kraken about MATIC and the Polygon
14   Network reinforced investors’ reasonable expectation of profits from an investment in
15   MATIC due to the managerial efforts of Polygon.
16         390. For example, on its website, Kraken provides investors with analysis
17   about the price of MATIC. Specifically, Kraken website states:
18         “The crypto price of MATIC is subject to various factors. These include
           market demand and supply, cryptocurrency news, bull and bear markets,
19         technological advancements, and adoption of the Polygon network . . .
           Positive news, such as new partnerships or regulatory developments, could
20         lead to an increase in demand and, consequently, the price of MATIC.
           Technological advancements within the Polygon network could also affect
21         the MATIC coin price, as a more efficient network could attract more
           users…these improvements could result in increased demand and trading
22         volume.”
23                9.    NEAR
24         391. “NEAR” is the native token of the NEAR blockchain protocol, a proof-
25   of-stake blockchain conceived in 2018 by Delaware corporation Near, Inc. (“Near”)
26   and its founders Alexander Skidanov and Illia Polosukhin. According to the NEAR
27   whitepaper, the NEAR protocol uses a technology dubbed “Nightshade” that allows
28   the volume of transactions on the network to grow indefinitely without hurting its
       COMPLAINT                                 74
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 1   performance, measured in speed and transaction fees.
 2         392. In 2019, Skidanov and Polosukhin founded the NEAR Foundation, a
 3   non-profit organization under Swiss law that claims to be “responsible for contracting
 4   protocol maintainers, funding ecosystem development, and shepherding core
 5   governance of the NEAR protocol.”
 6         393. From Q3 2017 to Q1 2020, Near raised approximately $34.1 million
 7   through the offer and sale of notes that were convertible into then-nonexistent NEAR
 8   tokens. In July 2019, Near filed forms with the SEC claiming its offer and sales of
 9   convertible notes was exempt from registration and stating that Near “intended to use
10   the proceeds [of the sales] for the development of the Near protocol.” In August
11   2020, Near held an additional sale of approximately 120 million NEAR tokens. In
12   January 2022, the NEAR Foundation raised an additional $150 million through a
13   purportedly “private” sale of NEAR tokens to venture capital investors.
14         394. From the time of its offering and continuing through the Relevant
15   Period, NEAR was offered and sold as an investment contract and therefore a
16   security.
17         395. The price of all NEAR tokens goes up or down together.
18         396. Although U.S. investors purportedly were prohibited from participating
19   in the early seed funding rounds or NEAR’s initial minting, NEAR has been available
20   for purchase and sale in the United States since at least October 2020, including since
21   June 2022 on the Kraken Trading Platform and through the Kraken Services.
22         397.    The information publicly disseminated by Near, the NEAR Foundation,
23   and their common founders would lead a reasonable investor, including those who
24   purchased NEAR since June 2022, to view NEAR as an investment. Specifically,
25   NEAR holders would reasonably expect to profit from the efforts of these groups to
26   grow the protocol because this growth would in turn increase the demand for and the
27   value of NEAR.
28        398. Approximately 35.7% of the one billion NEAR tokens initially minted
       COMPLAINT                            75
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 1   were transferred to early investors that held convertible notes. Of the remaining
 2   initial supply of NEAR tokens, 14% were allocated to the “Core Contributors,”
 3   11.7% to “Early Ecosystem” developers, 10.0% to the NEAR “Foundation
 4   Endowment,” 17.2% to “Community Grants and Programs,” and 11.4% to
 5   “Operations Grants.” Accordingly, the financial incentives and fortunes of Near’s
 6   core team members and those of early developers (who collectively owned
 7   approximately 25.7% of the initial supply of NEAR) were aligned with those of other
 8   NEAR investors (who owned approximately 35.7% of the initial NEAR supply).
 9         399. For example, Near stated in its SEC filings that it would pool investment
10   proceeds from the sale of notes convertible into NEAR tokens to develop the NEAR
11   protocol and grow Near’s business and, as recently as January of 2022, that it further
12   pooled proceeds from the sale of $150,000 in NEAR tokens that month for the same
13   purposes.
14         400. And, as the NEAR Foundation publicly touted, it did in fact use its
15   allocation of NEAR tokens to support the development of the NEAR protocol and
16   ecosystem. For example, in October 2021, the NEAR Foundation announced “$800
17   million in funding initiatives targeted at accelerating growth” of the NEAR
18   ecosystem. Subsequently, in a “transparency report” blog post on the Near website,
19   the NEAR Foundation stated that it had “deployed $540M in fiat and tokens during
20   [the last quarter of 2021 and the first two quarters of 2022]” to support “NEAR
21   ecosystem projects” and launch “regional hubs” around the world, among other
22   efforts to help grow the ecosystem.
23         401. NEAR’s founders remain actively involved with the NEAR protocol
24   today through the NEAR Foundation. In fact, Polosukhin sat on the NEAR
25   Foundation Council (its governing group) until March 2023 and has served as its
26   Chair for the past two years.
27         402. In a post on one of the NEAR Foundation’s blogs discussing the role of
28   the NEAR ecosystem in funding projects to continue growing the NEAR protocol,
       COMPLAINT                               76
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 1   Polosukhin likened the NEAR ecosystem to a venture capitalist picking an
 2   investment strategy and likened the NEAR community to investors in the NEAR
 3   ecosystem:
 4
 5
 6
 7
 8
 9         403. Similarly, as an indicator of investor demand, Near has touted its high-
10   profile venture capital partners. For example, until March 2023, Near’s website
11   stated that NEAR is “[b]acked by the best,” followed by the logos of 10 venture
12   capital firms and the following quotation from one of those firms’ partners: “NEAR
13   is poised to be a leading smart contract blockchain platform, combining first-rate
14   technology with a fast-growing developer ecosystem. We are excited to support
15   NEAR as we ramp up our investments in the digital asset space.”
16         404. Near has also marketed the feature of the NEAR protocol that
17   automatically burns 70% of all NEAR tokens accumulated as fees. Accordingly, the
18   greater the number of transactions that occur on the NEAR protocol, the greater the
19   number of NEAR tokens that are burned, reducing their total supply. As with other
20   crypto asset securities set forth herein, marketing that NEAR tokens are being burned
21   is designed to lead holders of surviving NEAR tokens to expect the potential for
22   profit due to the reduction in their supply.
23         405. Public statements made by Kraken to investors about NEAR and the
24   NEAR Protocol reinforced the reasonable expectation of profits from an investment
25   in NEAR due to the managerial efforts of the NEAR Foundation.
26         406. For example, on its website, Kraken describes for investors NEAR’s
27   history, team, and development. Further, Kraken provides investors with analysus
28   about the price of NEAR. Specifically, Kraken’s website states: “NEAR Protocol
       COMPLAINT                                77
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 1   increases its token supply by 5% each year, with 90% of these newly released tokens
 2   going to validators. The remainder goes to the blockchain’s treasury to support
 3   platform development.” “Investors may wish to buy NEAR and add it to their
 4   portfolio should they believe in the future of sharding as a way to scale blockchain
 5   technology and wish to have a stake in the future development of the NEAR
 6   ecosystem.”
 7                 10.   OMG
 8         407. The so-called OMG Network, previously known as OmiseGO, was
 9   founded in 2017. In or around December 2020, Genesis Block Ventures (“GBV”), a
10   Hong Kong-based venture capital firm, acquired the OMG Network. In or around
11   February 2021, the OMG Network partnered with another entity to develop the so-
12   called Boba Network. In or around August 2021, the OMG Network changed its
13   name to the “OMG Foundation” and the following year became the “BOBA
14   Foundation.”
15         408. The OMG token was issued by the OMG Network as a “proof-of-stake”
16   token on the OMG Network. The OMG Network held an ICO on or about June 24,
17   2017, raising approximately $25 million through the sale of OMG tokens to the
18   public in exchange for ether. The OMG Network issued a maximum supply of
19   approximately 140.2 million OMG tokens, and sold approximately 65.1% of this
20   supply to the public in the ICO.
21         409. Today, OMG tokens are available for buying, selling, and trading on
22   several crypto asset trading platforms in exchange for fiat currency (namely U.S.
23   Dollars) or certain crypto assets. Kraken made OMG available for buying, selling,
24   and trading on the Kraken Trading Platform and through the Kraken Services in
25   October 2019, and it remains available.
26         410. From the time of its offering and continuing through the Relevant
27   Period, OMG was offered and sold as an investment contract and is therefore a
28   security.
       COMPLAINT                                  78
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 1         411. The price of all OMG tokens goes up or down together.
 2         412. The OMG Network pools the proceeds from OMG token sales to fund
 3   the development, marketing, business operations, and growth of the OMG Network,
 4   as reflected in OMG’s “Crowdfunding Whitepaper,” which used the following chart
 5   to explain how funds raised during the ICO would be used to develop the network:
 6
 7
 8
 9
10
11
12
13
14         413. Specifically, the OMG whitepaper explained that the “[m]ajority of the
15   funds raised will go towards the development of open source software. Overall fund
16   usage will be split approximately 2:1 ratio between network and end-user application
17   development.” The whitepaper also detailed how the “budget” would be used, which
18   included items such as “[c]onstruct and roll-out blockchain, including full node
19   client,” and “[c]onstruct and roll-out decentralized custody of funds.”
20         414. The stated distribution of the OMG tokens tied the fortunes of the OMG
21   token holders together and to the fortunes of the promoters. For instance, the OMG
22   tokens were allocated as follows: 65.1% for purchase by the public; 20% for “future
23   costs and uses including use for network validation as part of the development and
24   execution of the project” as a “reserve”; 9.9% for OMG “team members and key
25   contributors who worked to develop the ideas, supporting structures and actual
26   implementation of the OmiseGO Project”; and 5% for an airdrop to ether token
27   holders to “encourage incentive alignment with the Ethereum mainnet.” Even after
28   the ICO, and through changes in management, the promoters of OMG continued to
       COMPLAINT                              79
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 1   tout the connected fortunes of OMG token holders and the promoters.
 2         415. The information publicly disseminated by OMG’s promoters would lead
 3   a reasonable investor, including those who purchased OMG since October 2019, to
 4   view OMG as an investment. Specifically, OMG holders would reasonably expect to
 5   profit from the promoters’ efforts to grow the OMG Network because this growth
 6   would in turn increase the demand for and the value of OMG.
 7         416.   For example, the whitepaper touted the experience of the parent holding
 8   company (Omise Holdings Pts. Ltd.), the OMG Network team, and advisors that
 9   would contribute to building a successful blockchain network—the usage of which
10   would derive value to the OMG token holders. The whitepaper stated that “[o]ur
11   technical team is led by experienced professionals who have track records in high
12   growth technology startups” and that they had the “best setup to implement this
13   project” given the parent holding company’s “established track record in building a
14   fast-growing fintech startup in the payments and value-transfer landscape.”
15         417. Further, materials available at the time of the ICO indicated that the
16   development of the platform by the OMG Network team could lead to profits for
17   OMG token holders. For instance, the whitepaper provided that “[a]t the OmiseGo
18   Network layer, token holders will be eligible to earn transaction fees for interchange
19   payments and decentralized exchange. Activity ‘on-chain’ will pay transaction fees to
20   token holders for validating the network.”
21         418. Moreover, the OmiseGo website at the time of the ICO indicated that
22   OMG token holders could anticipate receiving a share of the fee revenue generated
23   on the platform, and a document purporting to establish the terms under which users
24   purchased OMG during the ICO clarified that potential for profit was linked to efforts
25   of the OMG Network team (“[W]hile the individuals and entities . . . assigned to
26   [create the network] will make reasonable efforts to develop and complete OmiseGO,
27   it is possible that such development may fail and User’s OMG may become useless
28   and/or valueless due to technical, commercial, regulatory or any other reasons”).
       COMPLAINT                                 80
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 1         419. Even after the OMG Network released a beta version of its platform in
 2   mid-2020 (which did not exist at the time of the ICO), the OMG Network team
 3   continued to emphasize their commitment to developing the network. For instance,
 4   in or around June 2020 (more than seven months years after OMG was listed on the
 5   Kraken Trading Platform), the OMG Network team expressed an intended focus on
 6   future marketing for the platform: “We’ve always followed the mantra that our work
 7   will speak for itself in the market place and we’ve gone very light on the marketing—
 8   focusing instead on top-notch engineering and solid business development.” In or
 9   around October 2020, the OMG Network’s CEO wrote that for the remainder of 2020
10   the OMG Network “team remains focused on onboarding our CeFi partners to build
11   out the Layer-2 value transfer use-case and improve the protocol and UX” and that
12   the “goal is to get OMG Network technology embedded into a network of merchants
13   and enterprises, so it becomes the go-to protocol for value transfer.”
14         420. Similarly, while the management of the OMG Network continued to
15   change hands, the new teams still stated publicly that they would focus on making
16   efforts to achieve growth for OMG. For example, at the time of the acquisition by
17   GBV in or around December 2020, the OMG Network stated, “Today,
18   @genesisblockhk acquires OMG Network. We’ll work together to grow our
19   ecosystem and accelerate the adoption of OMG Network as the value transfer layer
20   for #Ethereum!” And in November 2021, the new team touted, “OMG was trading
21   around $3-4 when the current team took over. Fair to say quite a bit of value has been
22   created since then between OMG and BOBA.”
23         421. Upon acquisition of the OMG Network in December 2020, GBV
24   promised to continue to “promote the accelerated growth of OMG Network, and
25   further enhance the adoption of OMG blockchain in Asia and beyond.”
26         422. These statements led