COINIST PRESENTS…

Understanding The Tezos ICO Drama

Tezos was scrutinized from the get-go. Anytime you pull in $232 million, you’re going to attract attention. In October, Tezos first beat back claims the project was under SEC investigation. In November, things escalated even more. Word leaked out of a power struggle between founders Kathleen and Arthur Breitman, and Tezos Foundation head Johann Gevers.

A PEAK BEHIND THE TEZOS ICO DRAMA

One of the hottest ICOs of 2017, Tezos has been embroiled in drama recently. Positioning itself as an improved blockchain, Tezos launched in Switzerland’s “Crypto Valley” in a time where crypto is going mainstream. Tezos was backed by big name Venture Capitalist Tim Draper, and raised record-setting sums. We even shortlisted Tezos as a project to study within our premium, members-only Coinist Insiders Network. With strong support and a healthy war chest what’s not to love? Tezos seemed like a lock to release a successful token. What’s gone wrong?

Tezos first attracted attention when the company speculated they might raise $20 million in an ICO. They pulled in $232 million, far and away the most an ICO had ever raised at the time. The record has since been broken again, but it remains one of the most-discussed crypto projects. You can see how Tezos ranks up in our charts which show the biggest ICOs of all time.

Tezos pitched itself as being easily updateable, and being able to avoid the hard forks that have defined Bitcoin recently. It also included improvements to the smart contracts that have been Ethereum’s calling card. Everything looked good on paper.

Tezos was scrutinized from the get-go. Anytime you pull in $232 million, you’re going to attract attention. In October, Tezos first beat back claims the project was under SEC investigation. In November, things escalated even more. Word leaked out of a power struggle between founders Kathleen and Arthur Breitman, and Tezos Foundation head Johann Gevers. And now a lawsuit has been filed to the San Francisco branch of the Superior Court of California, by Tezos ICO investor Andrew Baker.

In America, you’re innocent until proven guilty, and before getting into the gory details, we must stress no ruling has been made. Tezos still has considerable resources. Legendary Silicon Valley investor Tim Draper has been behind the project since the get-go. We’ve already discussed how Tezos has money to spare, and is headquartered in a crypto-friendly country. There’s every possibility this lawsuit is found to be meritless, and Tezos launches to great success.

That said, things certainly aren’t looking good. It’s important to explain the role of the Tezos foundation. Established to support the project, Johann Gevers heads up the foundation, which controls Tezos’s funding. Meanwhile, the actual software that will power “Tezzies,” and the intellectual property belongs to the Breitmans. The long-term goal was for the Breitmans to remove themselves from Tezos, allowing it to achieve decentralization.

Unfortunately, both parties have lashed out at each other, questioning the motives and character of the other party. It’s never a good look for a project when the highest-ranking employees are publicly feuding. All named in in the lawsuit, Gevers and the Breitmans are accused of selling unregistered securities, committing securities fraud, false advertising, and unfair competition. In a CoinDesk interview, lawyer Stephen Palley described the situation as “a complicated mess.” The lawsuit is unlikely to have a quick and easy resolution.

The accusation of “selling unregistered securities,” is one you’ll probably hear again soon. We’ve extensively covered this on Coinist, but countries are cracking down on ICOs that resemble securities. Tokens that fail the Howey Test are in trouble. If Tezzies are labeled securities (Even though they’re yet to be released), that’s a whole new bucket of worms.

The Breitmans have also come under fire for their vesting schedule. Per CoinTelegraph, a smart contract regularly releases 1/48th of their share. This is preferable, of course, to all the funds being dumped in their laps at once. Tim Draper is a noted opponent of start-ups receiving all of their funds at once. Even the best team could be tempted by hundreds of millions of liquid funds. But the lack of accountability worries some. Even if Tezos is behind schedule (which it is) the Breitmans still receive their payment regardless.
If things go truly south and Tezos has to refund investors, that’s not an easy fix either. The $232 million paid to Tezos was sent in Bitcoin and Ethereum. With multiple Bitcoin forks and increases in both currencies, that money is worth considerably more now. Would investors get back their investment in fiat, or in crypto? That could get messy quickly too.

Tezos is juggling quite a few balls in the air right now. The team has the resources and backing to make an impact in the crypto world, but they’ll have to emerge strong through these issues first.

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