274 A.3d 287
Del. Super. Ct.2022Background
- Diamond Fortress (owner of patented ONYX biometric software) and its CEO Charles Hatcher granted EverID an exclusive license and advisory services in exchange for payment in EverID’s cryptocurrency (“ID Tokens”) rather than cash.
- Contracts provided Diamond Fortress 10,000,000 tokens and Hatcher 2,500,000 tokens, with 25% payable at the ICO/final TDE and the remainder subject to multi-quarter/monthly lock-up distributions; both agreements referenced SEC regulatory compliance (e.g., Rule 144).
- EverID held an ICO on February 8, 2021, but never distributed any tokens; plaintiffs demanded performance, EverID did not respond, plaintiffs sued, and EverID defaulted.
- Court entered default judgment on liability, finding repudiation plus nonperformance constituted a total breach; damages were reserved for later hearing.
- The court held (1) ID Tokens are securities under the Howey test given the parties’ economic realities; (2) CoinMarketCap is a reliable USD valuation source for tokens; and (3) damages are calculated under the New York Rule (highest intermediate value within a reasonable replacement period).
- Applying a three-month reasonable period (Mar 4–Jun 3, 2021), the highest CoinMarketCap price for ID Tokens was $2.01 (April 9, 2021); damages awarded: Diamond Fortress $20,100,000 and Hatcher $5,025,000, plus pre- and post-judgment interest.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether EverID repudiated and breached the Agreements | Plaintiffs: EverID’s failure to distribute tokens after ICO and failure to provide assurances = repudiation + total breach | EverID: no response/default | Court: found repudiation and total breach; liability entered on default |
| Whether ID Tokens are securities under Howey | Plaintiffs: their license/services were an "investment"; profits depended on EverID’s development and launch; Howey factors met | EverID: no responsive argument (default); broader authorities treat digital assets variably (SEC/CFTC) | Court: ID Tokens are securities under Howey; agreements’ SEC-related language supports that intent |
| Proper valuation source to convert tokens to USD | Plaintiffs: use CoinMarketCap historical prices as reliable market data | EverID: no response/default | Court: adopted CoinMarketCap as reliable valuation source |
| Proper damages method and timeframe | Plaintiffs: apply New York Rule—use highest market price within reasonable replacement period (proposed three months from notice) | EverID: no response/default | Court: applied New York Rule, three-month period from Mar 4–Jun 3, 2021; used $2.01 high on Apr 9; computed awards and granted pre/post-judgment interest |
Key Cases Cited
- W.J. Howey Co. v. SEC, 328 U.S. 293 (U.S. 1946) (establishes the investment-contract test for securities)
- Galigher v. Jones, 129 U.S. 193 (U.S. 1889) (articulates the historic rule measuring conversion damages by the highest intermediate value)
- Am. Gen. Corp. v. Continental Airlines Corp., 622 A.2d 1 (Del. Ch. 1992) (Delaware court adopted the New York Rule variation for fluctuating securities damages)
- Siga Tech., Inc. v. PharmAthene, Inc., 132 A.3d 1108 (Del. 2015) (restates Delaware principles for contract damages based on parties’ reasonable expectations)
- S.E.C. v. Kik Interactive Inc., 492 F. Supp. 3d 169 (S.D.N.Y. 2020) (example of a court classifying token sales as securities under Howey)