ENVION CASE – ANALYSIS OF FIRST ICO-INVESTOR LAWSUIT

ENVION ICO is increasingly becoming a worldwide reference case for legal issues and investors protection in the context of token issuances. With a volume of around USD 100 million and more than 30,000 investors, ENVION is among the top 15 of the world’s largest ICOs. Complaints, official investigations and criminal charges suggest that legal standards for future Token Sales and investor protection are being set in this case.

The first crypto wave, which developed between 2016 and 2018, was heavily discussed to take place in a legal vacuum outside established regulatory frameworks. The hundreds of Initial Coin Offerings (ICO), which according to CoinSchedule raised over 25 billion dollars, have now called the financial market supervisory authorities and lawyers onto the scene and slowly it is realized that regulatory frameworks are also applicable for new fundraising methods.

The ENVION ICO actually was advertised to address the supposed legal vacuum for blockchain-based crowdfunding with appropriate procedures by issuing a Swiss prospectus and engaging experienced legal advisors to structure the Token Sale appropriately.

Nevertheless, currently, several legal proceedings are in progress around ENVION:
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In view of the many different procedures, it seems very challenging to get ENVION up and running, a startup which has not yet been operational. Each individual proceeding contains legal explosives that may prevent ENVION from operating as a company as planned. The probability that all current proceedings will be decided in a timely manner in a way so that ENVION can start operations is currently close to zero.

The Investors’ Lawsuit

The German law firm CLLB Rechtsanwaelte has filed a lawsuit against ENVION AG and its co-founder and shareholder TRADO GmbH. We had the opportunity to study the lawsuit in detail and to communicate with Istvan Cocron, the responsible partner of CLLB.

The lawsuit filed with a Berlin court on behalf of some ENVION investors is essentially based on the following fundamental allegations:

• The illegitimacy of the chosen ICO concept within the applicable regulatory framework in Germany;
• Personal misconduct of some acting people and the companies managed by them;

In the area of personal misconduct, the plaintiffs purport that the defendants Michael LUCKOW and Matthias WOESTMANN essentially conducted the following unlawful actions:

• false and misleading information in the white paper, prospectus, and social media communication, immoral conduct;
• Violation of various German capital market laws, e.g. TRADO GmbH’s fiduciary administration of investor funds on behalf of ENVION AG would have required a regulatory permission;
• Unauthorized receipt and withholding of investor funds by TRADO GmbH (i.e. misappropriation of investors’ funds)
• Deliberate non-disclosure that
  • TRADO GmbH and Micheal LUCKOW de facto controlled ENVION AG.
  • that LUCKOW already been entered in a German debtor register and was, therefore, an improper person for the fiduciary administration of several million euros for ENVION AG.
  • the fees for an alleged patent application were not paid within the statutory period of three months and the patent application is thus legally deemed to be withdrawn.
• failure to implement security and compliance regulations on the part of ENVION AG to prevent misappropriation by third parties.
• Manipulation of the Smart Contract by TRADO GmbH during the ICO, e.g. elimination of the lock-up period and redirection of ICO revenues to “private” wallets.

In the lawsuit, the investors request repayment of their original investments as they would never have invested in ENVION if they would have been aware of the “correct” situation.

Istvan Cocron on the ENVION case:

Envion/Trado is certainly a precedent, as the German courts are for the first time dealing with the legal relations between initiators and investors of an ICO. Hopefully it will then also be clarified whether the investor protection rights already consolidated by the comprehensive jurisdiction in Germany also applies to investors of an ICO, which can be assumed due to the existing parallels to the regulated and unregulated capital market.

I further assume that the first oral hearings will take place before the LG Berlin in 2018.

Interpretation and analysis

The allegations made in the lawsuit against the founders of TRADO GmbH with Michael LUCKOW on the one hand and the co-founder and ENVION board member Matthias WOESTMANN, on the other hand, are consistent with the publicly known facts. The law firm CLLB has structured these, collected additional proofs from different files and conducted its own research to reach the corresponding legal conclusions.

In any case, it should be noted that many of the accusations raised in the complaint have nothing to do with WOESTMANN’s or LUCKOW’s history, but are simply presented as alleged misconduct within the context of the ICO. Currently, the discussion in the (social) media is mainly conducted at the personal level and the respective past lives of the two founders LUCKOW and WOESTMANN are taken as a basis to judge them. The lawsuit abstracts from the background and focuses on the identified misconduct in the ICO.

The lawsuit argues that according to the substance over form principle – which has to be applied – the swiss legal entitiy and the prospectus established according to the Swiss law are just not valid.

Following the statements of the complaint, the ICO of ENVION AG would not have been admissible in its chosen form under the applicable supervisory regulations in Germany. The lawsuit identifies several specific violations of the law as well as regulatory violations and concludes that investors were just misled. That sounds plausible and legally stringent.

Should the plaintiffs win their case before the court in Berlin, this would also be a milestone for investor protection in the crypto area. This part of the lawsuit could ultimately result in greater legal certainty for token issuers and investors.

Rescission of the Token Sale

In view of the multidimensional legal problems and regulatory investigations, it seems unlikely that ENVION will be able to commence its planned business activities in the near future and generate the promised profits for investors. A rescission of the ICO would therefore probably be the most appropriate option. Whether the money for this rescission is available at ENVION or TRADO, however, seems more than questionable.

Even in the currently unlikely event that the pending lawsuits can be settled in or out of court, the regulatory threats by Swiss FINMA and Deutsche BaFIN remain.