The Novel Legal Strategy Bringing This ICO-Backed ‘Micro-Mobility’ Startup to Court

Salvatore Palella is often credited as the man who brought electric scooters to Italy. Less known is his attempt to bring ride-sharing to the blockchain.

In June 2019, Italian Minister of Transportation Danilo Toninelli granted a decree to allow micro-mobility businesses to operate in cities that decided to participate in an e-scooter trial, at Palella’s urging. That’s the story the serial entrepreneur tells of his startup Helbiz, the “first sharing electric scooter company” in the country. Or at least, the first one partially funded by cryptocurrency.

With a fleet of 8,000 scooters in Italy alone, and offices reportedly in New York, Milan, Madrid, Belgrade and Singapore, Helbiz is well-positioned in a buoyant industry. 

In June 2019, the company announced plans for an initial public offering (IPO) through a dual listing on NASDAQ and AIM Italia, an exchange dedicated to small, high growth, firms. It would be a notable exit in an industry that exploded in popularity in 2017, but has yet to find long term profitability. 

Instead of cheering, however, Helbiz’s early investors have filed suit. In a complaint seeking class action status, filed June 18 in the United States District Court for the Southern District of New York, 20,000 investors claim Palella, Helbiz and several co-conspirators are liable for a breach of contract regarding the startup’s fund-raising model. 

ICO boom

Strewn about urban and suburban sidewalks, e-scooters have been a highly-contested battleground for venture capitalists. Market leaders Lime and Bird rode the everything-is-tech-if-it’s-an-app wave to unicorn status. But Helbiz, founded in 2015, took a different route: an initial coin offering (ICO).

In 2017, in the midst of the ICO boom, Palella began promoting HelbizCoin (HBZ) and its associated blockchain platform as a peer-to-peer solution to reinvent the ride-sharing economy. Capitalizing on the mania over crowd-sharing businesses and crypto, Palella raised nearly $40 million from small investors, he said at the time. 

Unlike other ICO projects that have been brought to court – usually over securities law violations – plaintiffs behind the class action are accusing Palella, Helbiz, et al. of breaking their promise to use this utility token as advertised. 

“When they sold this token, they made promises about how it would be used on the platform. They took the money and broke the promises. That kind of misconduct is at least a breach of contract and could very well amount to fraud,” Michael Kanovitz, a civil rights attorney of the litigating firm, Loevy & Loevy, said. 

Kanovitz’s argument focuses on promises Palella allegedly made to investors before, during and after the token sale regarding the use of HelbizCoin on its software platform. According to the complaint, Helbiz planned to use the capital raised from its ICO to build a “smartphone-based vehicle rental platform” – at that time envisioned to expand from scooters to cars to seaplanes, which would function entirely on HBZ.

“At no point did the whitepaper disclose any intent to allow rentals on the Helbiz platform in any currency other than HelbizCoin,” the complaint claims. Though the project’s original whitepaper did say the “choice to create a native token for Helbiz transactions is not casual… the conclusion of our careful analysis was that only a native token allows Helbiz to optimize for the [company’s] objectives,” the plaintiffs note.

Helbiz responded with a written statement saying “the lawsuit filed last week against Helbiz Inc., Salvatore Palella and others is baseless and the claims, including the breach of contract claim, are without merit.”

Legal gambit

The case “is highly unusual,” said Jason Gottlieb, a partner at Morrison Cohen. Gottlieb maintains a database of cryptocurrency lawsuits and found the vast majority of token projects are brought to court under securities violations. It’s a pattern of litigation other skilled observers have noticed.

“Typically, they just get sued for securities fraud or regular old fraud,” Nic Carter, a partner at Castle Island Ventures and frequent contributor to CoinDesk, said. 

“Even though the substance of the complaint hints at fraud, the plaintiffs notably decided not to include any fraud claims, under the securities laws or otherwise,” Jake Chervinsky, general counsel at DeFi startup Compound, said. Offering an explanation for the novel legal strategy, he said that securities claims might be “time-barred,” or past the statute of limitations. One year, in this case. 

According to Chervinsky, many ICOs were conducted under SAFT, or “simple agreement for future tokens” guidance, an investment contract that complies with securities regulations. It usually provides disclaimers of liability and mandatory arbitration clauses, essentially nullifying a potential “breach of contract claim.” 

Helbiz didn’t issue under SAFT guidance, “so common law claims like breach of contract may be viable,” Chervinsky said. In fact, this “gambit” may make it easier to bring a case to court, which otherwise would have to meet relatively strict securities fraud pleading standards, Gottlieb said. 

Kanovitz, acting for the plaintiffs, said the legal team could add claims of securities violations after discovery, a period where evidence is gathered from the defendants. While the SAFT is “indeterminate,” meaning it can only be applied on a case-by-case basis, the plaintiffs could instead apply the Howey Test, a fact-intensive interpretation of financial assets outlined by the U.S. Securities and Exchange Commission, to ascertain whether digital assets are securities. 

Helbiz seemed to suggest that its token sale would not fall under securities law: “The HBZ coin is a utility token and should not be viewed as a share of stock in any company,” the company statement, provided by Marcy Simon from the firm Agent of Change, read. 

“They are claiming it is a utility token and not a security,” Kanovitz said. “Our focus for now is on the defendants’ broken promises and the misrepresentations they made along the way. They owe coin holders money for breaking their promises, regardless of whether they should also have registered as a security.”

Helbiz denies these claims, and said “HBZ coin fulfilled all of its obligations and integrated directly into the Helbiz application,” according to its statement. 

Token dispute

Here’s the crux of Kanovitz’s argument. At launch, the platform accepted only fiat payments, breaking the promise that investors were sold on. Further, a parallel crypto payments integration at a later date received little use, “thereby strongly undercutting the value proposition on which the coins had been marketed,” the court document reads. 

Helbiz agrees that the token was unpopular, claiming “less than 2,100 rides were ever taken over 2 years with the HBZ coin,” but that it fulfilled its obligation to “seamlessly integrate” it into the application.

The claimants allege Palella successfully built the Helbiz platform using funds raised in a January pre-sale and crowd sale extending between February and March of 2018. Helbiz issued 520 million tokens to investors paying an average approximately $.15 per coin, court filings said. 

Helbiz refutes these claims and said, the “vast majority of funding for the development of the platform and the acquisition of the fleet came from this and other private investments by shareholders in Helbiz Inc.”

The application has been downloaded 100,000 times, and Helbiz has a presence in cities across Italy, Spain, Portugal, among other European countries, as well as a foothold in several U.S. cities.

Tokenomics

One anonymous claimant, who said he purchased upwards of $10,000 worth of HBZ, said he believed in the soundness of the project and the fundamental rules of tokenomics it represented. Meaning that if the platform grew in popularity, the demand and, therefore, price for HelbizCoin would increase. 

It was these economic fundamentals on which Palella allegedly based his prediction that HBZ would eventually soar to $10 each – a 6566% return from its ICO price – according to the court document. At that time, CoinMarketCap was a sea of green, with thousands of tokens gaining marketshare. This market exuberance, coupled with images of Palella and his supermodel partner jet-setting around the world, made it easy to ignore rational, economic thinking and buy into Helbiz’s token, but the vision it represented, the trader said. 

That was by design, the plaintiffs argue. The 62-page document outlines several supposed instances of false advertising, deceptive statements as well as the expropriation of investor money to fund Palella’s lavish lifestyle. These includes a non-existent deal with Alibaba as well as plans for “a flying Helbiz drone taxi that would revolutionize urban travel.” Plaintiffs argue these wild claims were a way to “pacify” investors growing antsy over the slow development of the project.

At the time the token project was announced, Helbiz pitched itself as “a seamless car sharing solution,” according to a preserved version of its website found on the Wayback Machine. Like many startups, the vision shifted, at one point involving crowdsourced yachts and private jets, to what would become solely a “last mile” transportation tech startup with a fleet of scooters and bikes. 

Throughout this transition, Palella is said to have encouraged investors to hold onto the token, or buy more, as its price plummeted – while he and his co-conspirators allegedly sold their stakes, according to the complaint. This practice is often referred to as a “pump and dump.”

At 4:25 a.m. on May 7, 2018, for instance, Palella allegedly tweeted, “If you sell even a single $HBZ for under $1 before the platform has launched in July, you have really not understood the scale of the project from day 1. It is always a choice to sell, but you should REMOVE crypto investor from your bio then.” The message has since been deleted. 

Palella denies that he sold large quantities of the token for himself or that the ICO brought in anything more than $1.5 – 1.6 million. This last point is contradicted by several statements he made to the media – including in Bitcoin Magazine, Ansa Magazine and NASDAQ – posts on professional and personal social media accounts, as well as information provided by Etherscan, a tool that tracks immutable blockchain records. 

“Just when we were close to the launch [of Helbiz], the cryptocurrencies exploded… we decided to create our cryptocurrency with an initial coin offering raising 38 million dollars,” [Google Translate], Palella told Ansa in an article published June 6, 2018.

Helbiz has not clarified the discrepancy between statements, but “will be addressing that matter with the court,” Simon said, relaying the message.

Second charge

In May, the firm announced it would destroy all the tokens by the end of July, citing a lack of use. The original blogpost has since been deleted, Kanovitz said, but can be found using the Internet Archive. Plaintiffs argue that this move is an attempt to “extinguish” the token holder’s rights over the company. 

Helbiz said the token doesn’t confer ownership over the company, an argument that has precedence. “One of the worst aspects of ICO tokens was that they didn’t give holders any right or title to the underlying business,” Chervinsky said, adding “it’s interesting to see the plaintiffs ask for [legal remedy] giving them ownership of Helbiz in its entirety.”

The same blog post, mentioned above, said participants in the ICO who have not sold their tokens on the secondary market will receive an equivalent amount of ETH paid during the ICO. Those who bought their coins on the secondary market have been offered approximately $.0002, the last exchange price, worth of ETH, per token. 

“Essentially nothing,” the complaint reads. Helbiz said the repurchase price is set at a “200% premium to the current price of the HBZ coin.” The token lost 99% of its value in its first few months of trading.

“The offer is a sham, however, because no one, or almost no one, who bought in the ICO continued to hold their coins while the price was dropping almost 100-fold. They sold for what they could, never expecting that there would be a refund offer a year later, an offer made only after it was apparent that everyone had already bailed out on the coin,” the complaint continues. 

The announcement to destroy the smart contract follows an initiative allegedly directed by the firm to get the tokens delisted from multiple exchanges. IDEX came forward and stated, “$HBZ has been de-listed due to team request.” 

This is part of a picture plaintiffs paint of a company trying to distance itself from a failed token project ahead of a IPO. They cite numerous examples where HelbizCoin was marketed as an internal project, not a partner to the company, including on the company’s official website. 

They allege that HBZCoin.com and Helbiz.com, the official sites for HelbizCoin and Helbiz the company, share a common IP address, domain name registrar and service to conceal the name of the person registering the site. The websites are also allegedly “housed in the same server farm in Kansas,” according to the complaint.

In its statement, Helbiz noted the tokens were “sold by HBZ Systems, a company that is not a party to the lawsuit,” insinuating that HBZ is the work of a third party, that was integrated with, but not of, Helbiz.

When asked if Palella indeed signed the original version of the white paper, his press agent declined to address the question directly, sending a statement reading: “Mr. Palella has always been transparent about his relationship with Helbiz Inc. and the HBZ coin.”

Kanovitz said the destruction of the smart contract and offer to return a fraction of invested funds is an attempt to hold “holders under duress.” He said that token holders paid for the construction of a business and ought to maintain some ownership in it. 

As the complaint reads: “the coin and company were synonymous.”

It’s a novel argument, Jason Gottlieb, the crypto lawyer, said. “It will be interesting to see if this unusual approach gains any traction.”