What is the difference between a coin with monetary value and one with only internal token uses? The complaint for this class action alleges that Xunlei Limited, which offered a “OneCoin” token to users for sharing storage and bandwidth, was actually engaged in an ICO (initial coin offering) and IMO (initial miner offering) and thus violating financial laws.
The class for this action is all investors who acquired Xunlei American Depository Shares (ADSs) between October 10, 2017 and January 11, 2018.
Xunlei specializes in cloud-based acceleration technology and operates an Internet platform in China to enable users to manage digital media. Its primary product is OneCloud, a storage device that allows users to share storage and idle bandwidth via a “mining machine” with content delivery networks.
OneCoin, the complaint claims, was “a blockchain-based product” given to users who shared their bandwidth; in return, they could use OneCoin to buy Xunlei products and services, such as extra storage or faster download speeds.
The sharing was mentioned in the company’s Form 6-K for its third fiscal quarter, filed with the Securities and Exchange Commission (SEC) on November 20, 2017. The complaint quotes it as saying Xunlei is becoming “a growth-oriented company developing innovative cloud computing products and exploring emerging blockchain technology” and that its “crowd-sourced computer technology utilizes idle computing power including bandwidth, storage and CPU from individual bandwidth contributors to make internet more affordable to everyone.”
On a related conference call, Xunlei’s CEO claimed that the “company has no plan at all to monetize” the coin and insisted that “we work closely with the regulatory authorities” and “meet all the regulations...”
Less than a week later, a business partner of Xunlei accused the company of conducting an unlawful ICO by issuing its OneCoins. Xunlei denied this, but its ADSs fell by over 25%. The company insisted that its OneCoin was only for use on its own platforms “and should not be traded on other transaction platforms.” It subsequently renamed the token Lianke.
However, on January 12, 2018, the National Internet Finance Association of China put out a risk alert notice on “Disguised ICO Activities” that said that Xunlei “in effect substitutes Lianke for the duty to pay back project contributors in legal tender, making it essentially a financing activity and a form of disguised ICO.” It added that “with frequent promotional activities and publishing of trading tutorials, Xunlei has lured many citizens without sound discernment into IMO activities.” Xunlei’s ADSs fell again, this time by over 27%.
The complaint claims that Xunlei did not disclose that it had engaged in unlawful financial activity and conducted a disguised ICO and IMO. The withholding of this information, the complaint says, was a violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, making Xunlei responsible for inflated ADS prices that fell when the truth was revealed.