Hunichen v. Atonomi LLC
2:19-cv-00615
| W.D. Wash. | Jun 2, 2020Background
- CENTRI (a Seattle software company) formed subsidiary Atonomi to build a blockchain-based IoT security network and issued ATMI tokens via a private SAFT pre-sale and a one-day public sale in 2018.
- Plaintiff Hunichen bought a SAFT in Feb. 2018 for 225 ETH (~$191,250). Atonomi raised ~42,000 ETH (≈ $25M) across sales; tokens were released July 12, 2018.
- Plaintiff alleges the SAFTs and ATMI tokens were unregistered, non-exempt securities sold with general solicitation, pooling/syndicates, and early unlocking that enabled speculative trading; he says ICO proceeds were diverted (e.g., to CENTRI) and largely dissipated, leaving tokens essentially worthless.
- Defendants contend the ATMI tokens are utility tokens (not securities), that SAFT purchasers were accredited and sales complied with Reg D, and that proceeds were used for legitimate operations and network upkeep.
- Plaintiff moved for a preliminary injunction seeking an asset freeze and an accounting of assets traceable to the ICO. The magistrate judge found serious questions and likelihood of success on the merits as to both SAFTs and ATMI tokens, irreparable harm, and granted a limited preliminary injunction (freeze and accounting) against Atonomi and CENTRI only; relief against individual defendants was denied for lack of specific evidence.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether SAFTs were unregistered, non-exempt securities under WSSA/Reg D | SAFTs were sold with general solicitation, via pools/syndicates, and defendants failed to meet Rule 506(b)/502(d) requirements | SAFT purchasers were verified accredited investors; SAFTs contained restrictive language and KYC/third‑party verification | Court found serious questions and a likelihood of success that SAFTs were non‑exempt/unregistered (preliminary relief warranted) |
| Whether ATMI tokens are securities (Howey test) | Tokens were purchased as investments (investment of value), funds pooled to develop network, and profit expectations depended on defendants’ efforts | Tokens are utility tokens for use on the Atonomi Network, disclaimers negating investment intent | Court held tokens likely qualify as securities under Howey (investment, common enterprise—horizontal and vertical commonality—and expectation of profits) |
| Whether plaintiff showed irreparable harm warranting asset freeze | ICO proceeds appear dissipated; risk of further dissipation threatens plaintiff’s equitable rescission remedy | Defendants say network remains active, tokens have utility, and freeze would impair token owners and network upkeep | Court found likelihood of irreparable harm from dissipation and that balance of equities tips sharply for freeze limited to corporate defendants |
| Scope of injunction (entities vs. individuals) | Sought freeze/accounting against corporate and individual defendants | Argued request was overbroad and vague re: traceable assets; individual defendants lack evidence of dissipation risk | Court granted freeze/accounting only as to Atonomi and CENTRI; denied extending preliminary relief to individual defendants for lack of specific evidence |
Key Cases Cited
- Winter v. Natural Res. Def. Council, 555 U.S. 7 (2008) (four‑factor preliminary injunction standard)
- Mazurek v. Armstrong, 520 U.S. 968 (1997) (preliminary injunction is extraordinary; burden on movant)
- Univ. of Texas v. Camenisch, 451 U.S. 390 (1981) (purpose of preliminary injunction and relaxed evidentiary standards at that stage)
- In re Focus Media, 387 F.3d 1077 (9th Cir. 2004) (asset freezes permissible to preserve equitable remedies)
- SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (Howey test defining an investment contract)
- Cellular Eng'g v. O'Neill, 118 Wn.2d 16 (Wash. 1991) (Washington’s application of Howey; substance over form)
- SEC v. R.G. Reynolds Enters., 952 F.2d 1125 (9th Cir. 1991) (Howey element formulations)
- SEC v. Telegram Group Inc., 448 F. Supp. 3d 352 (S.D.N.Y. 2020) (pooling and post‑launch token value tied to project success; supports finding horizontal commonality)