23.  A cryptocurrency is a digital asset designed to work as a medium of exchange or a  store of value or both.  Cryptocurrencies leverage a variety of cryptographic principles to secure  transactions, control the creation of additional units, and verify the transfer of the underlying  digital assets.   24.  Bitcoin was the world’s first decentralized cryptocurrency.  It is also the largest and  most popular cryptocurrency, with a market capitalization of approximately $126 billion.  Bitcoin  spawned a market of other cryptocurrencies that, together with Bitcoin, have a current market  capitalization of approximately $192 billion.  (The term “bitcoin” can refer to both a computer  protocol and a unit of exchange. Accepted practice is to use the term “Bitcoin” to label the protocol  and software, and the term “bitcoin” to label the units of exchange.)   26.  Blockchains act as the central technical commonality across most cryptocurrencies.   While each blockchain may be subject to different technical rules and permissions based on the  preferences of its creators, they are typically designed to achieve the similar goal of  decentralization.   27.  Accordingly, blockchains are generally designed as a framework of incentives that  encourages some people to do the work of validating transactions while allowing others to take  advantage of the network.  In order to ensure successful validation, those completing the validation  are also required to solve a “Proof of Work” problem by expending computational resources which  has the effect of making the blockchain more accurate and secure.  For Bitcoin, those who validate  the blockchain transactions and solve the “Proof of Work” program are rewarded with newly  minted bitcoin.  This process is colloquially referred to as “mining.”   28.  Mining is one method by which an individual can acquire cryptocurrencies like  Bitcoin.  A second and more common manner is to obtain cryptocurrencies from someone else.   This is often accomplished by acquiring it through an online “cryptocurrency exchange.”    29.  Online cryptocurrency exchanges are one place to purchase Bitcoin and other  cryptocurrencies.  These exchanges are similar to traditional exchanges in that they provide a  convenient marketplace to match buyers and sellers of virtual currencies.   30.  In  April  2013,  there  were  only  seven  cryptocurrencies  listed  on  coinmartketcap.com, a popular website that tracks the cryptocurrency markets.  As of this filing,  the site monitors more than 2,000 cryptocurrencies.   32.  Ethereum is the second-most popular cryptocurrency, with a market capitalization  of approximately $16 billion.  The Ethereum blockchain functions similarly to the Bitcoin  blockchain insofar as its miners act as the validators of the network.  Miners of the Ethereum  blockchain are paid for their services in the form of newly minted ether.  (The term “Ethereum”  refers to the open software platform built on top of the Ethereum blockchain, while the term “ether”  is the unit of account used to exchange value within the Ethereum “ecosystem,” i.e., the overall  network of individuals using Ethereum or participating  in the development of its network.)   33.  Unlike Bitcoin’s blockchain, Ethereum was designed to enable “smart contract”  functionality.  A smart contract is a program that verifies and enforces the negotiation or  performance of a contract.  Smart contracts can be self-executing and self-enforcing, which  theoretically reduces the transaction costs associated with traditional contracting.   34.  As an example of how a smart contract works, consider a situation where two  people want to execute a hedging contract.  They each put up $1,000 worth of ether.  They agree  that, after a month, one of them will receive back $1,000 worth of ether at the dollar exchange rate  at that time, while the other receives the rest of the ether.  The rest of the ether may or may not be  worth more than it was at the beginning of the month.    36.  In order to enable widespread adoption and standardized protocols for smart  contracts, the Ethereum community has created certain out-of-the box smart contracts called  Ethereum Request for Comments (“ERCs”).    37.  An ERC is an application standard for a smart contract. Anyone can create an ERC  and then seek support for that standard.  Once an ERC is accepted by the Ethereum community, it  benefits Ethereum users because it provides for uniform transactions, reduced risk, and efficient  processes.  The most widespread use of ERCs is to allow individuals to easily launch and create  new digital tokens.  C. ERC-20 Tokens   38.  ERC-20 is an application standard that the creator of Ethereum, Vitalik Buterin,  first proposed in 2015.  ERC-20 is a standard that allows for the creation of smart-contract tokens  on the Ethereum blockchain, known as “ERC-20 tokens.”   39.  ERC-20 tokens are built on the Ethereum blockchain, and therefore they must be  exchanged on it.  Accordingly, ERC-20 tokens are functionally different than cryptocurrencies like  Bitcoin and Ethereum because they do not operate on an independent blockchain.    40.  ERC-20 tokens all function similarly by design—that is, they are compliant with  the ERC-20 application standard.  Some properties related to ERC-20 tokens are customizable,  such as the total supply of tokens, the token’s ticker symbol, and the token’s name.  All ERC-20  tokens transactions, however, occur over the Ethereum blockchain; none of them operates over its  own blockchain.   42.  Between 2014 and 2016, Bitcoin’s price fluctuated between $200 and $800.  During  this same time frame, ether’s price fluctuated between roughly $1 and $10.   43.  By the end of 2016, interest in cryptocurrencies began to accelerate, with prices  growing at a rate historically unprecedented for any asset class.  Over the course of 2017 alone,  bitcoin’s price increased from approximately $1,000 to approximately $20,000.  Ethereum’s  growth was even more startling.  On January 1, 2017, Ethereum was trading at approximately $8  per ether.  Approximately one year later, it was trading at over $1,400 per ether—a return of  approximately 17,000 percent over that period.   44.  Seeking to capitalize on the growing enthusiasm for cryptocurrencies, many  entrepreneurs sought to raise funds through initial coin offerings, or ICOs, including ICOs for  newly created ERC-20 tokens, such as the QSP tokens.  Many of these issuers improperly chose  not to register their securities offerings with the SEC in order to save money and not “open their  books” to the SEC, even though investors thereby were denied access to critical information they  would have received from an SEC-registered offering.  As a result investors, including investors  in QSP, were denied access to important information before making their investment decision.    46.  Over 2017 and 2018, nearly $20 billion was raised through ICOs, none of which  was registered with the SEC.  Of the approximately 800 ICOs launched between 2017 and 2018,  the vast majority were issued using the ERC-20 protocol.   47.  Like most ICOs, ERC-20 ICOs were typically announced and promoted through  public online channels.  Issuers, including Quantstamp, typically released a “whitepaper”  describing the project and terms of the ICO.  These whitepapers advertised the sale of tokens or  coins through the ICO.  They typically advertised the creation of a “new blockchain architecture.”   48.  The whitepapers typically contained vastly less information than a registration  statement filed with the SEC would have included.  For example, whitepapers  often did not include  a “plain English” description of the offering; a required list of key risk factors; a description of  important information and incentives concerning management; an explanation of how the proceeds  from the offering would be used; and a standardized format that investors could readily follow.   49.  When tokens were sold through an ERC-20 ICO, the issuer usually asserted that  such tokens entitled their holders to certain rights related to a venture underlying the ICO, such as  the right to use certain services provided by the issuer.  In almost all cases, these tokens could also  be traded, thereby giving investors a reasonable expectation of profits to be derived from the  entrepreneurial or managerial efforts of others (that is, the people operating the issuer whose efforts  will impact the value of those tokens on the secondary market).    51.  Prior to its November 2017 ICO, Quantstamp published a whitepaper.  Casting the  Quantstamp protocol as a solution to the “smart contract security problem,” the whitepaper  described the Quantstamp protocol as “the first smart contract security-auditing protocol.”  The  whitepaper asserted that Quantstamp would create a “scalable cost-effective system to audit all  smart contracts on the Ethereum network” and that over time they expected “every Ethereum smart  contract to use the Quantstamp protocol to perform a security audit because security is essential.”   The whitepaper touted its team of software testing experts who “collectively have over 500 Google  Scholar citations.”    52.  QSP was launched through use of the ERC-20 protocol.  At launch, 1 billion  tokens were created through use of the ERC-20 protocol.   53.  Quantstamp retained approximately 35 percent of those tokens.  Quantstamp sold  the remaining 65 percent of the tokens during QSP’s ICO, which Quantstamp organized and ran.   Over its three day ICO, from November 17 to November 19, 2017, Quantstamp raised  approximately $31 million in proceeds.   58.  Misleadingly, Quantstamp also promoted itself as being similar to Ethereum and  Bitcoin, which are not securities nor required to be registered with the SEC.  Quantstamp’s stated  “goal is to create a permissionless and decentralized network much like Ethereum and Bitcoin.”   And Quantstamp’s co-founder Steven Stewart has expressly compared QSP tokens to those  cryptocurrencies: “Ether is used for fueling token transfers and other state changes.  We are  committed to exclusively using QSP to fuel our protocol.”  Indeed, in the QSP whitepaper,  Quantstamp represented to investors that “we are extending Ethereum with technology designed  to ensure the security of smart contracts.”  Indeed, the whitepaper claimed Quantstamp protocol  would one day “become part of the Ethereum protocol” itself.     59.  At the time of the QSP ICO, Quantstamp took advantage of the market’s lack of  understanding and awareness concerning how cryptocurrencies worked.  In the face of promises  that the Quantstamp protocol would one day “become part of the Ethereum protocol” able to “audit  all smart contract projects on Ethereum,” and considering the new technology at issue and  Quantstamp’s other statements, many individuals were understandably unaware that QSP tokens  had fundamentally different features than other cryptocurrencies, which the SEC has determined  are not securities.  Moreover, the Quantstamp whitepaper was ambiguous about how it would use  the proceeds of the QSP ICO, stating only that “all proceeds received by Quantstamp may be spent  freely by Quantstamp absent any conditions, save as set out herein.”    61.  In its whitepaper, Quantstamp also sought to emphasize the utility rather than  security token characteristics of QSP tokens.  Quantstamp stated that “Quantstamp tokens are sold  as a functional good” and that “[a]s of the date of publication of this paper, the Tokens have no  known potential uses outside of the Quantstamp ecosystem and are not permitted to be sold or  otherwise traded on third-party exchanges.”  Of course, Quantstamp did list QSP tokens on third  party exchanges within days after its ICO, and then repeated its’ instruction that QSP tokens were  “not permitted to be sold or otherwise traded on third-party exchanges” in its retrospective legal  disclaimer, at which point those statements were almost surely false.    62.  Prior to April 3, 2019, when the SEC released its Framework, it was therefore  unclear to a reasonable investor that QSP was a security.  For example, in March 2018, investors  sought clarification from Quantstamp on reddit to “help us investors to get this more clear”  regarding how the SEC might impact QSP tokens.  Quantstamp responded evasively, saying that  “Quantstamp has retained top legal counsel from the beginning and conservatively followed and  will continue to follow the regulatory guidance at every step” without further elaboration.   64.  Other thought leaders in the space, such as the lawfully registered broker-dealer  Coinbase, opined in late 2016 that “we have considered the question of whether issuance of a  Blockchain Token prior to the existence of a system would constitute a security.  We have not  found conclusive law on the subject, but believe that the better view is that a non-security  Blockchain Token does not become a security merely because the system as to which it has rights  has not yet been created or completed.”   65.  In sum, before the SEC issued its Framework on April 3, 2019, a reasonable  investor would not have concluded that ERC-20 tokens like the QSP token were generally  securities subject to the securities laws.  On the contrary, they were confronted with representations  both from token issuers and from cryptocurrency discussions that led them reasonably to believe  they were not investing in securities.   G. The QSP Tokens Are Securities   66.  QSP tokens are securities because they constituted an investment of money in a  common enterprise with a reasonable expectation of profits to be derived from the efforts of others.   At issuance, as described above, it was not clear that the QSP tokens were securities as defined  under federal and state securities laws.  Quantstamp acted as if the QSP tokens were not securities,  for example, by not ensuring that a registration statement was filed with the SEC, which would  have provided important disclosures to investors of the risks inherent in these investments,  including their speculative nature.     68.  By contrast, Quantstamp issued a substantial portion of the total stock of QSP  tokens at issuance, at very little economic cost to Quantstamp’s founders.  The creation of QSP  tokens thus occurred through a centralized process, in contrast to Bitcoin and Ethereum.  This  would not have been apparent at issuance, however, to a reasonable investor.  Rather, it was only  after the passage of time and disclosure of additional information about the issuer’s intent, process  of management, and success in allowing decentralization to arise that a reasonable purchaser could  know that he or she had acquired a security.  Purchasers were thereby misled into believing that  QSP was something other than a security, when it was a security.   70.  In the Framework, the SEC cautioned potential issuers:  “If you are considering an  Initial Coin Offering, sometimes referred to as an ‘ICO,’ or otherwise engaging in the offer, sale,  or distribution of a digital asset, you need to consider whether the U.S. federal securities laws  apply.”  The SEC explained the basics of the Howey test.  The U.S. Supreme Court’s Howey case and subsequent case law  have found that an “investment contract” exists when there is the  investment of money in a common enterprise with a reasonable  expectation of profits to be derived from the efforts of others. The  so-called “Howey test” applies to any contract, scheme, or  transaction, regardless of whether it has any of the characteristics of  typical securities. The focus of the Howey analysis is not only on the  form and terms of the instrument itself (in this case, the digital asset)  but also on the circumstances surrounding the digital asset and the  manner in which it is offered, sold, or resold (which includes  secondary market sales). Therefore, issuers and other persons and  entities engaged in the marketing, offer, sale, resale, or distribution  of any digital asset will need to analyze the relevant transactions to  determine if the federal securities laws apply.  Investors who bought QSP tokens invested money or other valuable consideration, such as  bitcoin and ether, in a common enterprise—Quantstamp.  Investors had a reasonable expectation  of profit based upon Quantstamp’s efforts, including, among other things, Quantstamp obtaining  listing of QSP tokens on various cryptocurrency exchanges.  a.  QSP Token Purchasers Invested Money    72.  Investors invested traditional and other digital currencies, such as bitcoin and ether,  to purchase the QSP tokens.  QSP tokens were listed on many cryptocurrency exchanges, and those  cryptocurrency exchanges permitted investors to purchase QSP with bitcoin and ether.   b.  QSP Token Investors Participated In A Common Enterprise   73.  The SEC Framework states: “In evaluating digital assets, we have found that a  ‘common enterprise’ typically exists.”  This is “because the fortunes of digital asset purchasers  have been linked to each other or to the success of the promoter’s efforts.”   74.  The QSP tokens are no different.  Investors were passive participants in the QSP  token ICO and the profits of each investor were intertwined with those of both Quantstamp and of  other investors.  Quantstamp was responsible for supporting QSP, pooled investors’ assets, and  controlled those assets.  Quantstamp also retained a significant stake in QSP, thus sharing in the  profits and risk of the venture.     80.  The SEC Framework clarifies that investors purchased the QSP tokens with a  reasonable expectation of profits.   81.  According to icodrops.com screenshots of the Quantstamp ICO, Quanstamp’s  Team & Advisors were personally allocated 20 percent of the QSP tokens, thus benefitting from  holding the same digital asset as the purchasers:   83.  Investment analysis of QSP tokens clearly indicates tokens were viewed as intended  to provide a return on investment: analysts were “bullish” on QSP tokens because of factors such  as “growth potential,” the “strong team,” the “constrained supply” and the likelihood of the tokens  being listed on additional exchanges in the future.   87.  The SEC Framework provides that the “inquiry into whether a purchaser is relying  on the efforts of others focuses on two key issues: Does the purchaser reasonably expect to rely on  the efforts of an [Active Participant]? Are those efforts ‘the undeniably significant ones, those  essential managerial efforts which affect the failure or success of the enterprise,’ as opposed to  efforts that are more ministerial in nature?”    91.  This dependency, however, on the managerial efforts of Quantstamp was not  apparent at issuance to a reasonable investor.  Considering the limited available information about  how QSP was designed and intended to operate, if such an investor were even able to interpret the  relevant law at the time, a reasonable investor lacked sufficient bases to conclude whether QSP  was a security until the platforms at issue, and its relevant “ecosystem,” had been given time to  develop.  In the interim, the investor lacked the facts necessary to conclude—let alone formally  allege in court—that the token she had acquired was a security.   It was only after the passage of  some significant amount of time, and only with more information about Quantstamp’s intent,  process of management, and lack of success in allowing decentralization to arise, that an investor  could reasonably determine that a token that was advertised as something other than a security was  a security all along.   92.  Investors’ profits in QSP tokens were to be derived from the managerial efforts of  others, specifically Quantstamp and its co-founders and development teams.  QSP token investors  relied on the managerial and entrepreneurial efforts of Quantstamp and their executive and  development teams to manage and develop the projects funded by the QSP ICO.   93.  Indeed, one of the few statements on the cover page of the QSP whitepaper is that  “[o]ur team is made of up of software testing experts who collectively have over 500 Google  Scholar citations.”   95.  Quantstamp touts their broader team as well, stating “[w]e are a diverse and talented  team of PhDs and security professionals with a wealth of experience.  We come from companies  like Google, Facebook, Apple, Goldman Sachs, BMW, Visa, and MathWorks. Together, we are  here to do some of the best work of our careers, driving smart contract security while defining a  new standard in blockchain security.”   96.  One self-described token holder, explaining how “value is accrued to the QSP  token,” stated that “Quantstamp isn’t shy about the caliber of their team, and rightfully so.  Their  team is filled with security PHD’s (with a huge amount of publications behind them combined)  and software engineers/business team with impressive experience in the industry.”   97.  Under this Framework, however complex the resolution of the issue would strike a  reasonable investor, QSP satisfies most if not all of the factors described as relevant to its  determination that a digital asset is a security.  Quantstamp created QSP tokens from thin air.   Quantstamp represented that it would develop a “Quantstamp ecosystem,” (i.e., the overall  network of individuals using QSP or participating in the development of its network) that would  increase the value of QSP tokens.  Plaintiff and the Class reasonably expected Quantstamp to  provide significant managerial efforts, to develop and improve the QSP ecosystem, to develop and  sustain a supportive network, and to secure listings at exchanges through which QSP tokens could  be traded or liquidated.  And Quantstamp represented that it would provide significant managerial  efforts to achieve these objectives and make the issued ERC-20 token a success.  H.  The SEC Has Concluded That Tokens Such As QSP Are Securities   A. The First Cryptocurrency: Bitcoin    Unregistered Offer and Sale of Securities  Tex. Rev. Civ. Stat. art. 581-33  (Quantstamp)  128.  Plaintiff realleges the allegations above.   129.  The Texas Securities Act forbids the offer or sale of unregistered securities.  Tex.  Rev. Civ. Stat. art. 581-7(A)(1).  Any person who unlawfully offers or sells an unregistered  security “is liable to the person buying the security from him, who may sue either at law or in  equity for rescission or for damages if the buyer no longer owns the security.”  Id. art. 581-