On April 24, 2019, the U.S. District Court for the Northern District of Georgia granted in part and denied in part a motion to dismiss a complaint alleging that the controlling shareholders of FLiK, a company designed to create an online distribution platform for entertainment projects, violated Sections 12(a) and 15 of the Securities Act and Section 10-5-1 of Georgia’s Uniform Securities Act by selling unregistered securities.
From August 20, 2017, through September 20, 2017, FLiK allegedly conducted an ICO of FLiK tokens to raise capital to launch the company and its online platform. FLiK never launched. The plaintiffs’ FLiK tokens allegedly became essentially worthless, resulting in losses of approximately US $2 million.
The defendants moved to dismiss the complaint on the ground (among others) that FLiK tokens were not securities under the federal and state securities laws. Applying the test set forth in SEC v. W.J. Howey Co., the court held that the complaint adequately alleged that FLiK tokens were securities because (1) the plaintiffs invested cash, Bitcoin, and Ether to purchase FLiK tokens; (2) the value of FLiK tokens depended on the launch of an online platform that did not exist at the time of the ICO; (3) the plaintiffs had a reasonable expectation of profits because the defendants advertised the potential growth in value of the FLiK tokens; and (4) the value of FLiK tokens was based entirely on the defendants’ efforts.