IN THE SUPERIOR COURT OF THE STATE OF DELAWARE

DIAMOND FORTRESS ) TECHNOLOGIES, INC ., and ) CHARLES HATCHER, II, ) ) Plaintiffs , )

) ) C.A. No. N21C
- 05
- 048 v. ) PRW CCLD ) EVERID, INC., ) ) Defendant. )

Submitted: January 1 8 , 2022 Decided: April 14, 2022
OPINION AND ORDER Upon Plaintiffs Diamond Fortress Technologies, Inc., and Charles Hatcher, II’s Motion for Default Judgment,

GRANTED
.
Kurt M. Heyman , Esquire, H EYMAN E NERIO G ATTUSO & H IRZEL , Wilmington, Delaware ; Walter A. Dodgen, Esquire, Zachary P. Mardis, Esquire , M AYNARD , C OOPER & G ALE , PC , Huntsville, Alabama

. Attorneys for Plaintiffs Diamond Fortress Technologies, Inc., and Charles Hatcher, II. United States Corporation Agents, Inc., Middletown, Delaware. Registered Agent for Defendant EverID, Inc.

WALLACE, J
.- 1

-

This breach

- of

- contract action arises out of Defendant EverID, Inc.’s failure to compensate the Plaintiffs, Diamond Fortress Technologies, Inc. and its CEO Charles Hatcher, II, for their combi ned assistance in developing EverID’s cryptocurrency trading platform and mobile application. For an exclusive license to use Diamond Fortress’s proprietary biometric software, EverID offered to remunerate the Plaintiffs via cryptocurrency token
distribu tions. The promised distributions were to occur upon the Initial Coin Offering (“ICO”) of “ID Tokens,” EverID’s newly created cryptocurrency, and u pon subsequent Token Distribution Events (“TDEs”). The ICO and several TDEs came
and went without Plaintiff s receiving a single token. No surprise, they then sued
EverID.
EverID has never respond ed , appear ed , or otherwise defend ed itself in any
manner i n this lawsuit . So the Plaintiffs filed a default judgment motion that the Court granted in part

— the Court found the breach but paused on the damages

. The Court conducted a subsequent hearing on the Plaintiffs’ purported economic damages that centered on just what might be the appropriate methodology and value

source for reckoning a damages judgmen t. The classification and valuation of cryptocurrency, as well as the calculation of damages resulting from the breach of a
cryptocurrency

- paid contract are novel matters to Delaware.- 2

- I. FACTUAL AND PROCEDURAL BACKGROUND 1
A. T HE P ARTIES
Diamond Fortress is a biometric software company. 2 Mr. Hatcher is Diamond
Fortress ’s CEO

— one with extensive experience in the global market of biometric
authentication and identity platform architecture

. 3
Diamond Fortress developed a patented software named “ONYX.” 4 ONYX
is a secure, touchless fingerprint

- identification software application that utilizes the camera on mobile devices, e.g. , smartphones, to detect and verify user identities by fingerprint recognition

. 5 Third parties can integrate the ONYX software into their own platforms by purchasing a license and software development kit. 6 Mr. Hatcher

1 The factual recitation of events discussed herein is wholly based on the Plaintiffs’ submissions. See Hauspie v. Stonington Partners, Inc. , 945 A.2d 584, 586 (Del. 2008) (“ The effect of a default in answering [ ] is to deem admitted all the well

- pleaded facts in the complaint.”); id. at 587 (“‘[A] default is not treated as an absolute confession by the defendant of his liability and of the plaintiff’s right to recover . . . Although he may not challenge the suffic iency of the evidence . . . .’”) (quoting Nishimatsu Const. Co., Ltd. v. Houston Nat. Bank , 515 F.2d 1200, 1206 (5th Cir. 1975)); see also Cigna Worldwide Ins. Co. v. Elegant Inc. , 2002 WL 1402348, at *2 (D. Del. June 25, 2002) (“ Once the default [judgmen t] has been entered , the well

- pleaded f acts of the complaint must be accepted as true.”).

2 Compl. ¶¶ 4, 10, Diamond Fortress Technologies, Inc. v. EverID, Inc ., N21C

- 05

- 048 PRW CCLD, May 4, 2021 (D.I. 1).

3 Id. ¶¶ 1, 21.

4 Id. ¶ 10.

5 Id.

6 Id.- 3

-

is often hired as an advisor by th ose buyers to assist with the ONYX software integration and the management of its use thereafter. 7
EverID, an entity active in the blockchain and cryptocurrency industry, is a corporation organized under Delaware law that maintains its principal office in Poway, California. 8 It created the cryptocurrency “ID Token s .” 9 As a component
of ID Token s , E verID also developed a blockchain

- based identity and financial platform but needed the means to verify and confirm its users’ identities. 10

B. T HE L ICENSE AND A DVISOR A GREEMENTS In or around September of 2017, the parties conferred about integrating the
ONYX software into EverID’s then

- developing cryptocurrency enterprise

. 11
In addition to i ntegrating the ONYX software into its platform, EverID made other demands. First, it req uested Mr. Hatcher serve as an advisor and mentor for
the i ntegration and duration of its use of ONYX. 12 Second, it required Diamond
Fortress to grant EverID an exclusive license to ONYX for digital or blockchain

7 Id. ¶¶ 1, 12.

8 Id. ¶ 6.

9 Id. ¶ 11.

10 Id.

11 Id.

12 Id. ¶ 21.- 4

-

wallet s; that required Diamond Fortress to halt its then

- active endeavors solicit ing other opportunities in the blockchain industry. 13 For t he award of EverID ’s exclusive ONYX software license, Diamond Fortress and Mr. Hatcher agreed to be compensated in EverID’s ID Tokens when EverID eventually held its ICO (the cryptocurrency equivalent of an initial public offering 14 ) and subsequent TDEs. 15

T he periodic token distributions were to be the means of satisf ying EverID’s payment obligation in lieu of Diamond Fortress ’s standard payment requirement of quarterly license “Run

- Time Transaction Fees

. ” 16
Diamond Fortress and Mr. Hatcher agreed to EverID’s demands , and the respective License and Advisor Agreement s ( together “Agreements”) negotiations
commenced. 17 While the Agreement negotiati ons were underway, Plaintiffs granted
EverID a software license key to immediately begin its integration and use of

13 Id. ¶ 13.

14 See S.E.C. v. Shavers , 2014 WL 12622292, at *7 (E.D. Tex. Aug. 26, 2014) (holding cryptocurrency investments offered by the defendant qualified as “securities” and “investment contracts”).

15 Compl. ¶ 13.

16 Compl. , Ex. A, ONYX Software Development Kit License Agreement, § 3.1(c)(i) (“License Agreement”).

17 Compl. ¶ 12.- 5

-

ONYX. 18 Mr. Hatcher also began assisting EverID with its mobile application development utilizing the ONYX software. 19
1. ONYX Software Development Kit License Agreement

. In September of 2018, Diamond Fortress and EverID finalized the License Agreement for EverID’s use of the ONYX software. 20 The Agreement is valid for a

ten

- year term and is governed by Delaware law. 21 The terms and means of compensation are expressly set forth in the Agreement. Upon execution of the Agreement, an initial license fee of $ 2 , 500 U.S. Dollars (“USD”) was to be remitted by EverID

. 22 EverID was also obligated
to tender “Run

- Time Transaction Fees,” which equated to fifteen percent (15%) of the gross revenues received from its use of ONYX, to be paid quarterly. 23 As discussed above, these fees were negotiated away in exchange for a se t amount of
ID Tokens and subsequent periodic token distributions

.

18 Id.

19 Id.

20 Compl., Ex. A, License Agreement.

21 Id. §§ 11, 17.

22 Id. § 3.1(a). The record is unclear whether this payment was ever tendered.

23 Id. § 3.1(b).- 6

-

Thus, Diamond Fortress ’s real economic interest for entering into this
transaction

— and its concession to give EverID an exclusive license to use ONYX

— is EverID’s assurance “to engage in a t oken sale” and award Diamond Fortress for its services accordingly: Ten Million (10,000,000) of ID tokens at the ICO or TDE to [ Diamond Fortress ]. This token grant shall be deemed to be an advance of, and credited to, [EverID] as payment for the Run

Time T ransaction Fees. The value of this token grant shall be determined by multiplying the number of tokens granted times the ICO or last TDE price. 24 Additionally, the token grants are subject to a distribution lock

- up, awarding
the initial 25% of the tokens at the ICO or final TDE and the remaining 75% to be
“distributed in 20 equal quarterly distributions” after the ICO or final TDE. 25
2. Charles Hatcher ’s Advisor Agreement

. EverID executed a separate Advisor Agreement with Mr. Hatcher. 26 Under this Agreement, Mr. Hatcher’s role was that of an independent contractor to mentor
or advise EverID on an as

- needed basis. 27 Mr. Hatcher’s compensation structure mostly mirrors Diamond Fortress’s , with just a variation in the number of tokens alloc ated and the distribution schedule

.

24 Id. § 3.1(c)(i).

25 Id. § 3.1(c)(ii) (emphasis added).

26 Compl., Ex. B, Advisor Agreement.

27 Id. §§ 1, 5.- 7

-

EverID was to distribute Two Million Five Hundred Thousand (2,500,000) tokens
to Mr. Hatcher at the ICO or final TDE. 28 Similar to Diamond Fortress ’s lock

- up distribution, the initial 25% of the tokens were to be distr ibuted at the ICO or final
TDE , with the remaining 75% of tokens to be “ distributed in 24 equal monthly
distributions after the ICO or final TDE. ” 29
As some clue as to how the parties inten ded the ID Tokens be treated or classified, both Agreements expressly provide that the token distributions “will also be subject to regulatory compliance such a [sic] Rule 144 of the Securities Act of
1933 . . . .” 30
C. E VER ID’ S B REACH AND THE I NSTANT L ITIG ATION EverID’s ICO occurred on February 8, 2021, and EverID should have then
tender ed its first partial payment s to the Plaintiffs. 31 EverID didn’t

. 32 Despite
numerous efforts to obtain EverID’s assurances that the token distributions were

28 Id. § 2.

29 Id. (emphasis added).

30 Id.; see also License Agreement § 3.1(c)(iii) (“[T]he foregoing grants of tokens are subject to . . . (c) regulatory compliance including, but not limited to, lock

- ups and restrictions, including but not limited to Rule 144 Restrict ions . . . .”).

31 Damages Hr’g Tr., 3

- 4, Diamond Fortress Technologies, Inc. v. EverID, Inc ., N21C

- 05

- 048 PRW CCLD, Oct. 28, 2021 (D.I. 27).

32 Id. at 4; see also Pls.’ Mot. for Default J. ¶ 21, Diamond Fortress Technologies, Inc. v. EverID, Inc ., N21C

- 05

- 048 PRW CCLD, July 16, 2021 (D.I. 12).- 8

-

forthcoming

—

both directly and via counsel

— EverID refused to respond or
distribute the tokens. 33
Diamond Fortress and Mr. Hatcher initiated suit here alleging two c ounts of
Breach of Contract

— one count for each Plaintiff. 34 Upon EverID’s failure to respond or otherwise defend itself, the Plaintiffs filed a m otion for d efault j udgment. 35
Consistent with this Court’s Civil Rule 55(b) , which provides for entry of
default judgment “ when a party against whom a judgment for affirmative relief is sought, has failed to appear, plead or otherwise defend as provided by these Rules , ” 36 the Court granted the Plaintiffs ’ motion with respect to EverID’s liability for its
breaches. EverID’s failure to provide any assurance within a reasonable time, as
well as its non

- performance of payment, constituted a repudiation and total breach of both Agreements. 37 But what then is the remedy?

33 Hr’g Tr. at 5; see also Compl. ¶¶ 30

- 32.

34 See generally Compl.

35 D.I. 12.

36 Campbell v. Robinson , 2007 WL 1765558, at *1 n.6 (Del. Super. Ct. June 19, 2007) (citing Del. Super. Ct. Civ. R. 55(b)(2) ).

37 Order Granting Pls.’ Mot. for Default J. in Part ¶¶ 2

- 3, Diamond Fortress Technologies, Inc. v. EverID, Inc ., N21C

- 05

- 048 PRW CCLD, Aug. 24, 2021 (D.I. 17); see also Hr’g Tr. at 7, 12

- 15.- 9

-

As observed recently, “Delaware law largely remains silent” on s cenarios
such as this. 38 That said, “ significant authority supports the conclusion that a repudiation coupled with simultaneous non

- performance gives rise to an action for
total breach .” 39

For instance, Corbin on Contracts teaches : Suppose next that the contract requires performance in installments or continuously for some period and that there has been such a partial failure of performance as justifies immediate action for a partial breach . If this partial breach is accompanied by repudiation of the contractual obligation such repudiation is anticipatory with respect to the performances that are not yet due. In most cases, the repudiator is now regarded as having committed a “total” breach , justifying immediate ac tion for the remedies appropriate thereto . . . . The non

- performance plus the repudiation constitute one and only one cause of action

. 40
And t hough Delaware has not per se adopted the Restatement (Second) of
Contracts rule regarding repudiation and adequ ate assurances , our courts have historically relied on its guidance in such situations. 41 The rule prescribes that upon

38 BioVeris Corp. v. Meso Scale Diagnostics, LLC , 2017 WL 5035530, at *8 (Del. Ch. Nov. 2, 2017), aff’d , 2019 WL 244619 (Del. Jan. 17, 2019).

39 Id.

40 Id. at *9 (quoting 9 Arthur Linton Corbin, Corbin on Contracts § 954 (interim ed. 2002) (citations omitted)); 10 John E. Murray, Jr., Corbin on Con tracts § 53.12 (Joseph M. Perillo, ed., rev. ed. 2014) (internal citations omitted)).

41 See , e.g. , Frontier Oil Corp. v. Holly Corp., 2005 WL 1039027, at *28 n.184 (Del. Ch. Apr. 29, 2005) (relying on the Restatement regarding “the nature of a demand for adequate assurances[.]”).- 10

-

an obligee’s request for adequate assurance of performance by the obligor, “the obligee may treat as a repudiation the obligor’s failure to provide” such assurance
within a reasonable time. 42 And “ a repudiation coupled with simultaneous non

performance gives rise to an action for total breach , allowing the non

- breaching party to bring an action for the entire contract pri ce .” 43 Accordingly, the Court determined EverID had indeed repudiated and was in total breach of both Agreements. 44 Given the novel circumstances of this case, however, a decision on damages was reserved pending further record development

. Under this Cou rt’s Civil Rule 55(b), “ [ j ] udgment is to be entered by the Court when the plaintiff’s claim is for a sum which is uncertain or cannot be fixed with certainty by computation.” 45 And w hen such uncertainty is present, and the Court must
“determine the amount of damages[,]” Rule 55(b)(2) authorizes the Court to “conduct such hearings

. . . as it deems necessary and proper

. . . .” 46

42 Restatement (Second) of Contracts , § 251 (1981).

43 BioVeris Corp. , 2017 WL 5035530, at *8 (emphasis added); see also Mumford v. Long , 1986 WL 2249 , at * 3 (Del. Ch. Feb. 2 1 , 1986 ) (holding where repudiation is found “the non

- breaching party is entitled to treat the contract as terminated, i.e. , as being at an end”).

44 Order Granting Pls.’ Mot. for Default J. in Part ¶¶ 2

- 3.

45 Campbell , 2007 WL 1765558, at *1 n.6 (citing Del. Super. Ct. Civ. R. 55(b)(2)).

46 Id at n.7

. ; see also Dill v. Dill , 2016 WL 4127455, at *1 (Del. Super. Ct. Aug. 2, 2016) (“ After a default judgment is ordered, an inquisition hearing is held to determine the amou nt of damages due. At an inquisition hearing, the Court’s findings on damages must be based on a preponderance of the evidence. The ‘sole focus of inquisition hearings is the amount of damages owed to the plaintiff, which is determined by the ... judge.’ Preponderance of the evidence means ‘the side on- 11

-

T he Plaintiffs supplemented the record with additional briefing supporting their damages claim. 47 The Court heard Diamond Fortress and Mr. Hatcher on the supplemented record. This is the Court’s judgment and explication on the computation of damages arising out of EverID’s failure to distribute the ID tokens as required under the License and Advisor Agreements.
I I. L EGAL ANALYSIS
A. C RYPTOCURRENCY , B LOCKCHAIN T ECHNOLOGY , AND B ITCOIN
It seems no Delaware court has yet grappled with the question posed here:
When the consideration to be paid on a contract is in cryptocurrency and the contract
is breached , how does the Court calculate the judgment to be entered?
A brief history of cryptocurrency, B itcoin, and blockchain technology might help one understand the Court’s answer here. Cryptocurrency is a type of digital or virtual currency “maintained by a decentralized network of participants’ computers.” 48 Cryptocurrencies are unique

which the greater weight of the evidence is found.’ Additionally, the standard remedy, or damages, for a breach of contract is base d upon the reasonable expectations of the parties, in an amount that is equal to the loss in value of defendant’s nonperformance, or breach. Damages for a breach of contract must be proven with reasonable certainty. Recovery is not available to the extent that the alleged damages are uncertain , contingent, conjectural, or speculative.”) (internal citations omitted).

47 D.I. 21.

48 Archer v. Coinbase, Inc. , 267 Cal. Rptr. 3d 510, 513 (2020).- 12

-

as they “exist solely on the internet and are unregulated and unmanaged by third parties, such as ban ks or governments.” 49 It uses cryptography for security, and “[l]ike traditional forms of currency, cryptocurrency can be bought and sold on digital exchanges.” 50 Like an initial public offering in a securities context , an initial coin offering, or ICO, occurs when a new species of cryptocurrency token is issued in exchange for fiat or already circulating virtual currencies to raise capital. 51 Cryptocurrency relies on blockchain technology, a distributed ledger system, to ensure the security and integrity of the virtual currency. 52 Blockchain technology is a peer

- to

- peer system that tracks and records digital transactions around the globe. 53 To use a blockchain system, a user first creates a wallet, which contains information used to move units of a cryptocurrency on a blockchain. When the user downloads or purchases a wallet, software in the wallet generates a private key (a large integer num ber). That private key is then used to mathematically generate a public key (also a large integer number), which is used to create an address (a mix of numbers and symbols). This

49 Blocktree Props., LLC v. Pub. Util. Dist. No. 2 of Grant Cn ty. Washington , 380 F. Supp. 3d 1102, 1110 (E.D. Wa sh . 2019).

50 Balestra v. Giga Watt, Inc. , 2018 WL 8244006, at *1 (E.D. Wash. June 18, 2018).

51 Id.

52 Zietzke v. United States , 2020 WL 264394, at *1 (N.D. Cal. Jan. 17, 2020).

53 Josephine Shawver, Commodity or Currency: Cryptocurrency Valuation in Bankruptcy and the Trustee’s Recovery Powers , 62 B.C. L. R EV . 2013, 2018 (2021).- 13

-

address functions as the name suggests: it is the destination for a cryptocu rrency payment. 54
To avoid risks of double

- spending, blockchain places a series of transactions into a block, issues a timestamp, then chronologically incorporates the blocks into a larger chain of all the blocks within the ledger. 55 “Each block is irrev ersibly connected by a ‘proof

- of

- work’ protocol, the process by which a computer must solve a complex puzzle to authenticate each transaction and add it to the growing
blockchain.” 56 This authentication process is known as “mining,” or rather, the production of new coins or tokens. 57
Bitcoin is a well

- known name in the cryptocurrency world and is a type of digital currency that uses the blockchain technology

. 58 “Generally speaking, ‘Bitcoin’ in the capitalized singular refers to the cryptocurrency with the symbol BTC, while ‘bitcoin’ or ‘bitcoins’ refers more generally to cryptocurrency, inclusive of the cryptocurrency modeled on Bitcoin.” 59

54 Zietzke , 2020 WL 264394, at *1.

55 Shawver, supra at 2021.

56 Id. at 2022.

57 Id

.
58 Larissa Lee, New Kids on the Blockchain: How Bitcoin’s Technology Could Reinvent the Stock Market , 12 H ASTINGS B US

. L.J. 81, 90 (2016).

59 BDI Cap., LLC v. Bulbul Invs. LLC , 446 F. Supp. 3d 1127, 1131 n.3. (N.D. Ga. 2020). See also United Am. Corp. v. Bitmain, Inc. , 530 F. Supp. 3d 1241, 1251 (S.D. Fla. 2021) (where one litigant- 14

-

Bitcoin uses the “Bitcoin Blockchain” to track ownership and transfers “of every bitcoin in e xistence.” 60 To transfer bitcoins, a user must have a wallet, which ,

a gain , is a unique digital file that stores the bitcoin information. 61 Bitcoins can be acquired either by the mining process or simply by receiving them from someone
else. 62 The premise of Bitcoin was to use the blockchain technology for a “peer

- to

peer version of electronic cash” that prevents fraudulent spending but with out the oversight of regulatory policing. 63

B. S ECURITY VS . C OMMODITY Incidentally , t he lack of regulatory policing of cryptocurrenc y is not without
its problems and is on full display in the instant litigation

. Before the Court can
fashion a proper damages award , it must first determine how to classify
cryptocurrency, i.e. , is it a security / investment contract, a commodity, property, or

currency ? Lending to this problem is a lack of consensus among certain authorities on
how to treat cryptoc urrency
. For instance, the Commodity Futures Trading

characterized Bitcoin as “the most widely adopted form of peer

- to

- peer cryptocurrency cash

- like system in the world.”).

60 Kleiman v. Wright , 2018 WL 68129 14, at *1 (S.D. Fla. Dec. 27, 2018).

61 Id.

62 Id.

63 See Shawver, supra at 2021.- 15

-

Commission ( CFTC ) insists digital currencies are commodities subject to its regulatory authority. 64 While the United States Securities & Exchange Commission ( SEC ) determined, in its now
- familiar “DAO Report , ” that virtual currencies are
securities subject to the Securities Act of 1933 and the Securities Exchange Act of
1934. 65 Too, the few courts that have tackled the issue are a bit stuck on the classification quandary

. 66 O ne rece nt ly observing the complicator that “several agencies may have concurrent regulatory authority in the cryptocurrency space.” 67 Thus, the fact that cryptocurrency may be regulated as an “ investment contract ”

64 CFTC v. McDonnell , 287 F. Supp. 3d 213, 226 (E.D.N.Y. 2018) adhered to on denial of reconsideration , 321 F. Supp. 3d 366 (E.D.N.Y. 2018).

65 Tetragon Fin. Grp. Ltd. v. Ripple Labs Inc. , 2021 WL 1053835, at *7 , n .87 (Del. Ch. Mar. 19, 2021) (citing SEC, R EPORT OF I NVESTIGATION P URSUANT TO S ECTION 21( A ) OF THE S ECURITIES E XCHANGE A CT OF 1934: T HE DAO (2017), https://www.sec.gov/litigation/investreport/34

- 81207.pdf

) ).

66 See McDonnell , 287 F. Supp. 3d at 217 (holding virtual currencies are commodities subject to CFTC regulatory protections); Lagemann v. Spence , 2020 WL 5754800, at *11

- 12 (S.D.N.Y. May 18, 2020) (holding that plaintiffs had established their right to a judgment under the CEA after the defendant misappropriated their cryptocurrency investments); CFTC v. Gelfman Blueprint, Inc. , 2018 WL 6320653, at *4 (S.D.N.Y. Oct. 2, 2018) (holding virtual currencies are encompassed in the definition of commod ity under the Commodity Exchange Act); contra S

. E

. C

. v. Kik Interactive Inc. , 492 F. Supp. 3d 169 (S.D.N.Y. 2020) (holding that a company’s public sale of virtual currency was an investment contract subject to SEC registration requirements); Balestra v. AT BCOIN LLC , 380 F. Supp. 3d 340 (S.D.N.Y. 2019) (holding that digital tokens are considered securities).

67 United States v. Samuel Reed , 2022 WL 597180, *4 (S.D.N.Y. Feb. 28, 2022).- 16

-

under the Securities Act of 1933, “does not mean that a cryptocurrency is not a ‘commodity’ within the meaning of the [Commodity Exchange Act or] CEA.” 68
In mid

- 2021, Congress introduced the Digital Asset Market Structure and
Investor Protection Act

— a bill providing for the regulation of digital assets and digital asset securities. 69 The proposed bill includes amendments to current f ederal

s ecurities l aws and the CEA , defining and disting uishing a “digital asset” versus a “digital asset security” under the respective bod ies of law. 70 In short, under the proposed legislation, it appears a cryptocurrency’s
characteristics at a given time best determine whether it is subject to SEC or CFTC regulation ( e.g. , an ICO is generally considered a security because its purpose , like an IPO, is to raise capital by selling new tokens or coins to investors). 71
Within one

- hundred

- fifty (150) days of the bill’s enactment, the SE C and
CFTC are to jointly publish “a proposed rulemaking that classifies each of the major digital assets by (i) highest market capitalization and (ii) highest daily trading

68 Id.

69 Digital Asset Market Structure and Investor Protection Act, H.R. 4741, 117th Cong. (2021).

70 Id.

71 Eva Su, Digital Assets and SEC Regulation , C ONGRESSIONAL R ESEARCH S ERVICE (June 23, 2021) https://sgp.fas.org/crs/misc/R46208.pdf (“When a digital asset meets the criteria defining a security, it would be subject to securities regulation, per existing SEC jurisdiction. For example, most of t he initial coin offerings (ICOs) are securities, but Bitcoin is not a security, mainly because it does not have a central third

- party common enterprise.”)

.- 17

-

volume as either (1) a digital asset; or (2) a digital asset security.” 72 Notably, in defining “major digital assets,” the mandate refers the CFTC and SEC to “CoinMarketCap” as “an appropriate publicly available website” that publishes data on digital assets. 73
C. T HE SEC, H OWEY

, AND C RYPTOCURRENCY AS AN I NVESTMENT C ONTRACT
The Securities Act of 1933 74 and the Securities Exchange Act of 193 4 75 regulate the issuance and sale s of investment products that qualify as securities under each Act. Congress’ s intent in enacting these laws “was to regulate investments , in whatever form they are made and by whatever name they are called.” 76 This was to ensure the application of securities laws would “turn on the economic realities underlying a transaction , and not on the name appended thereto.” 77 Among many other investment

- related terms, Section 77b(a)(1) of the 1933 Act defines a “security” to mean an “investment contract

. ” 78 T he United States

72 See HR 4741.

73 Id. As of the date of this Opinion, the proposed legislation has yet to be ena cted.

74 15 U.S.C. § 77a et seq

.
75 15 U.S.C. § 78a et seq.

76 S.E.C. v. Edwards , 540 U.S. 389, 393 (2004) (quoting Reves v. Ernst & Young , 494 U.S. 56, 61 (1990)) (emphasis in original)

.
77 United Housing Found., Inc. v. Forman , 421 U.S. 837, 849 (1975).

78 15 U.S.C. § 77b(a)(1) (2021) (Definitions; promotion of efficiency, competition, and capital formation).- 18

-

Supreme Court animated those terms via the now well

- accepted Howey test: an
investment contract is “a contract , transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a thi rd party.” 79 This definition “embodies a flexible rather than a static principle, one that is capable of adaption to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.” 80

Not surprisingly, courts have looked to Howey to ascertain whether cryptocurrencies qualify as an unconventional scheme or contract that is governed by securities laws. 81 “Whether a transaction or instrument qualifies as an investment
contract is a highly fact

- specific inquiry.” 82 A c ourt must “examine the series of understandings, transactions, and undertakin g s at the time they were made .” 83 Accordingly , an application of the Howey test “requires an examination of the entirety of the parties’ unde rstandings and expectations

. ” 84

79 S.E.C. v. W.J. Howey Co. , 328 U.S. 293, 298

- 99 (1946).

80 Id. at 299.

81 See, e .g. , S.E.C. v. Telegram Grp. Inc. , 448 F. Supp. 3d 352, 364

– 65 (S.D.N.Y. 2020).

82 United States v. Zaslavskiy , 2018 WL 4346339, at *4 (E.D.N.Y. Sept. 11, 2018).

83 Telegram , 448 F. Supp. 3d at 368 (emphasis added).

84 See id . at 379 (citing Howey , 328 U.S. at 297

- 98).- 19

-

1. Courts Applying Howey Have Determined Cryptocurrency is a Security

.

a. Investment of Money
The first consideration under Howey is “whether an investment of money was part of the relevant transaction.” 85 An investment of money “need not be made in cash and refers more generally to ‘an arrangement whereby an investor commits assets to an enterprise or venture in such a manner as to subject himself to financial
losses.’” 86 Several federal district courts h ave recently had occasion to apply Howey in digital currency contexts. And i n each, the first prong was rather easily met. For example, one court determined the plaintiff

- investors’ assets that were
contributed in advance of a scheduled ICO

— “even if such investments were in the form of cryptocurrencies”

— was s atisf actory

. 87 In another similar matter, the plaintiff

- investors ’ exchange of one form of cryptocurrency for a number of forthcoming digital coins that the defendant marketed and promised to distribute at
its ICO event satisfied the investment

- of

- money prong
. 88 And finally, this criterion

85 Id . at 368.

86 Hodges v. Harrison , 372 F. Supp. 3d 1342, 1348 (S.D. Fla. 2019) (quoting S.E.C. v. Friendly Power Co. LLC , 49 F. Supp. 2d 1363, 1368

- 69 (S.D. Fla. 1999)); see also Uselton v. Comm. Lovelace Motor Freight, Inc., 940 F.2d 564, 574 (10th Cir. 1991) (“[I]n spite of Howey’s reference to an ‘investment of money,’ it is well established that cash is not the only form of contribution or investment that will create an investment contract.”).

87 Hodges , 372 F. Supp. 3d at 1348.

88 Balestra v. ATBCOIN LLC , 380 F. Supp. 3d 340, 347, 353 (S.D.N.Y. 2019).- 20

-

was satisfied in yet another case where the investors’ initial contributions in the form
of dollars and euros were in exchange for the future delivery of the defendants’ soon
to

- be

- launched cryptocurrency. 89
b. Common Enterpris e
The Court next looks to see if “ a common enterprise exists where the ‘fortunes
of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment of third parties.’” 90 Often considered here is whether “horizontal commonality” or “vertical commonality” inheres in the arrangement

. 91

H orizontal commonality requires one to show a “pooling ” of the investors’ interests

or assets , such that all involved share in the profits and risks of the enterprise alike

. 92
While vertical commonality “requires that the fortunes of investors be tied to the fortunes of the promoter.” 93
ICOs have constituted a common enterprise b ecause th e invest ees “pool” the contributed funds for the purpose of securing a profit for themselves and the

89 Telegram , 448 F. Supp. 3d at 368

- 69.

90 Hodges , 372 F. Supp. 3d at 1348 (quoting S.E.C. v. Unique Fin. Concepts, Inc. , 196 F.3d 1195, 1199 (11th Cir. 1999 )).

91 Telegram , 448 F. Supp. 3d at 369.

92 Revak v. SEC Realty Corp. , 18 F.3d 81, 87 (2d Cir. 1994).

93 Id . at 88 (emphasis in original); see also In re J.P. Jeanneret Assocs. , 769 F. Supp. 2d 340, 360 (S.D.N.Y. 2011) (holding “that strict vertical commonality (like horizontal commonality) is sufficient to establish a common enterprise under Howey ”).- 21

-

investors, and the risks and benefits are shared equally among the parties

. 94
Horizontal commonality has been found to exist both before and after the
launch of a defendant ’ s cryptocurrency and blockchain platform. 95 Where one initially “pools” his investors’ money in order to develop and launch a digital token
and blockchain platform, he effectively renders his investors’ profits entirely dependent upon the blo ckchain’s successful launch. 96 I f the launch is unsuccessful,
the investors are equally affected and lose any opportunity to profit. 97 H orizontal commonality can also exist post

- launch because the value of each token to be
distributed thereafter i s “dictated by the success [or failure] of the [blockchain] enterprise as a whole.” 98 So the “plain economic reality” post

- launch i s that the
distribution of the tokens continue s to represent the investors’ initial pooled funds. 99

94 Hodges , 372 F. Supp. 3d at 1348.

95 Telegram , 448 F. Supp. 3d at 369

- 70; see also Balestra , 380 F. Supp. 3d at 353

- 54 (plaintiffs plausibly demonstrated the “pooling of the investors’ funds” because the “Defendants encouraged investors to purchase ATB Coins based on the claim that the speed and efficiency of the ATB Blockchain would result in an increase in the coins’ value”); Revak , 18 F.3d at 87 (holding “horizontal commonality” exists where the investors’ profits are tied “to the success of the overall venture”)

.
96 Telegram , 448 F. Supp. 3d at 369

- 70

.
97 Id.

98 Id. at 370.

99 Id. at 369; see also Balestra , 380 F. Supp. 3d at 354 (finding a pooling of investments after the launch of a digital asset).- 22

-

c. Expectation of Profits Derived Solely f rom t he Efforts of Others
The final Howey factor is whether an investor entered into a transaction expecting to make a profit. “An investor possesses an expectation of profit when their motivation to partake in the relevant ‘contract, transaction or scheme’ was ‘the prospects of a return on their investment.’” 100 A profit has been interpreted to mean an “income or return, to include, for example, dividends, other periodic payments,
or the increased value of the investment.” 101 Here, a court consider s “ whether the efforts made by those other than the investor are the undeniably signi ficant ones, those essential managerial efforts which affect the failure or success of the enterprise.” 102
This criterion is satisfied whe re investors’ fortunes are “ directly tied to the failure or success of the products the [invest ee ] purport[s] to develop, and no
individual investor c[an] exert control over the success or failure o f his or her
investment.” 103 Indeed, an investor’s expectation of profits relies on the “ essential
efforts ” of investee when he or she wholly depends on that investee “to develop,

100 Telegram , 448 F. Supp. 3d at 371 (citing Howey , 328 U.S. at 301).

101 S.E.C. v. Edwards , 540 U.S. 389, 394 (2004).

102 Bamert v. Pulte Home Corp. , 445 F. App’x

. 256, 262 (11th Cir. 2011) (quoting S.E.C. v. Glenn W. Turner Enters. , 474 F.2d 476, 482 (9th Cir. 1973))

.
103 Hodges , 372 F. Supp. 3d at 1348.- 23

-

launch, and support the [blockchain]

. ” 104 In finding whether investors were “led to expect profits solely from the
efforts” of the investee

- defendants, one court was particularly persuaded by the defendants’ marketing materials. 105 In that case, the investors were induced by the
defendants’ market ing materials tout ing the potential profitability of their coins as well as their sole responsibility for developing and launching the blockchain platform

— “the performance of which largely dictated the value of [the coins]

. ” 106 Thus, it was the investee

- defendants’ “essential managerial efforts which affect the failure or success of the enterprise” that the investor

- plaintiffs relied on to yield a
return on their investment. 107
D. “ ID T OKEN S ” IS A S ECURITY Courts commonly classify a cryptocurrency as a security when the economic harm directly relate s to or aris es from its ICO. 108 T he proposed federal legislation

104 Telegram , 448 F. Supp. 3d at 375

- 79 (holding the totality of the evidence and economic realities indicate that defendants’ initial sales of the coins were part of a larger scheme, manifested by its “actions, conduct, statements, and understandings . . . with the i ntent and purpose that the [coins] be distributed in a secondary public market, which is the offering of securities under Howey ” ).

105 Balestra , 380 F. Supp. 3d at 357.

106 Id.

107 Id. at 355

- 57.

108 See S.E.C. v. Kik Interactive Inc. , 492 F. Supp. 3d 169 (S.D.N.Y. 2020) (holding that a company’s public sale of virtual currency was an investment contract subject to SEC registration- 24

-

seeking to resolve the classification question , too, draws the line at the ICO

. Just
l ike any se curity , the purpose of an ICO is to raise capital by selling new coins or
tokens to investors. Here, EverID’s failure to distribute the due ID Tokens on the date of the ICO is the direct cause of the Plaintiffs’ injury, i.e. , the ICO is the triggering eve nt underlying this litigation. Scrutiny under Howey of ID Tokens’ characteristics , its distribution scheme , and the transaction mapped out by the Agreements lead s inexorably to its
classification as a securit y
. 1. ID Tokens is a Security Under Howey
. At bottom, the Plaintiffs invested their expertise and proprietary resources to EverID’s cryptocurrency enterprise , solely relying on EverID’s development and management of the blockchain platform to yield a return on their investment.

a. Investment of Money
To determine “ whether an investment of money was part of the relevant
transaction ” , 109 o ur courts have been clear that money per se isn’t required to satisfy the first prong of Howey

. 110 All that’s required is an investor who “commits assets

requirements); see also Balestra , 380 F. Supp. 3d 340 (S.D.N.Y. 2019) ; Telegram , 448 F. Supp. 3d 352 (S.D.N.Y. 2020); Hodges v. Harrison , 372 F. Supp. 3d 1342 (S.D. Fla. 2019).

109 Telegram , 448 F. Supp. 3d at 368.

110 Uselton v. Comm. Lovelace Motor Freight, Inc., 940 F.2d 564, 574 (10th Cir. 1991).- 25

-

to an enterprise or venture in such a manner as to subject himself to financial
losses.” 111
The Plaintiffs committed both an exclusive license to their ONYX software
and related professional services to EverID ’s then

- developing , blockchain

- based cryptocurrency platform. In turn , the Plaintiffs elected to be paid in eventual token
distributions rather than by traditional means

— knowing full well that
cryptocurrency value is ever

- fl uctuating

. 112 T he Plaintiffs “ bore the risk of those fluctuations by agreeing to accept the cryptocurrency as payment instead of dollars” and subjected themselves to any attendant financial losses. 113 So, t he first prong of Howey is satisfied here.
b. Common E nterprise “[ A ] common enterprise exists whe re the ‘ fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment of third parties. ’ ” 114 EverID relied on the Plaintiffs’ software license and professional services ( i.e. , P laintiffs’ investments) to successfully develop and

111 S.E.C. v. Friendly Power Co. LLC , 49 F. Supp. 2d 1363, 1368

- 69 (S.D. Fla. 1999).

112 Hr’g Tr. at 10.

113 Id.

114 Hodges , 372 F. Supp. 3d at 1348 (quoting S.E.C. v. Unique Fin. Concepts, Inc. , 196 F.3d 1195, 1199 (11th Cir. 1999))

.- 26

-

launch its blockchain platform. And in turn, the Plaintiffs’ ability to recover any remuneration for their investment was interwoven with and wholly dependent upon
the successful launch of EverID’s blockchain. In other words, it was EverID’s
efforts

—using Plaintiffs’ investments

— to develop a successful token that create d a common enterpris e.
I t “is the nature of a common enterprise, to pool invested proceeds to increase the range of goods and services from which income and profits could be earned.” 115
And t he economic reality of this transac tion

— pre
- and post

- ICO

— i s that any future distribution, or continued growth of ID Tokens’ value, is representative of the
Plaintiffs’ investments in EverID’s blockchain platform. 116 T he value of each subsequent token distribution is “dictated by the success of the [blockchain] enterprise as a whole.” 117 And so, Howey ’s common enterprise criterion is met.

c. Expectation of Profits D erived f rom the E fforts of O thers
The third Howey factor also exists here. No doubt, Plaintiffs had “an expectation of profit when their motivation ” to enter into the negotiated Agreements

was based on the promise of payment in the form of (and profit from) token

115 Kik Interactive Inc. , 492 F. Supp. 3d at 179.

116 See Balestra , 380 F. Supp. 3d at 354 (finding a pooling of investments after the launch of a digital asset).

117 Id.- 27

-

distributions. 118 EverID’s successful development and launch of the ID Tokens’ enterprise was integral to the Plaintiffs’ “ prospects of a return on their
investment

. ” 119
The Plaintiffs acquiesced to EverID’s demand for an exclusive ONYX
software license on the condition that EverID allocate and distribute a significant amount of ID Tokens at the ICO. The token grant wasn’t in addition to payment for Plaintiffs’ services, but rather in lieu of traditional compensat ion for their
contributions to EverID

. 120 N otwithstanding the attendant risks involved with
cryptocurrency transactions , the substantial deferral of payment for their services , and the onerous distribution lock

- up , the Plaintiffs reasonably believed this compensation arrangement would provide a proportional return of profit in relation

to their initial investment.
Because the Plaintiffs could not be reimbursed until after EverID’s initial ICO, their expected profits “were directly tied to the failure or success” of EverID ’s blockchain platform

. 121 Their dependence on EverID “to develop, launch, and

118 Telegram , 448 F. Supp. 3d at 371 (citing Howey , 328 U.S. at 301).

119 Id.

120 See generally License and Advisor Agreements.

121 Hodges , 372 F. Supp. 3d at 1348.- 28

-

support the [blockchain]” is sufficient to find that the Plaintiffs’ expectation of profits relied on the “essential efforts” of EverID

. 122

T he economic reality of the parties’ entire transaction here establishes each Howey factor . The Plaintiffs’ overall investment into the platform was based on their expectation to be paid in eventual distributions of ID Tokens after the ICO. This expectation is no different than that of a traditional investment cont ract entered into before an IPO, and thus, ID Tokens is in this circumstance like a security. 123
2. Both License Agreements E xpressly R equire A dherence to SEC R egulatory C

ompliance

. Delaware law governs the parties’ respective License Agreements, 124 and in Delaware, a contract’s proper construction is a question of law. 125 The goal of contract interpretation “is to fulfill the parties’ shared expectations at the time they
contracted.” 126
The parties took care to include language in both Agreements that token distributions were subject to regulatory compliance under Rule 144 of the Securities

122 Telegram , 448 F. Supp. 3d at 375

- 79.

123 Id

. at 379 (citing Howey , 328 U.S. at 297

- 98) (requiring “an examination of the entirety of the parties’ understandings and expectations”).

124 Compl., Ex. A, License Agreement § X2

- 6.3.

125 Exelon Generation Acquisitions, LLC v. Deere & Co. , 176 A.3d 1262, 1266

– 67 (Del. 2017).

126 Leaf Invenergy Co. v. Invenergy Renewables LLC , 210 A .3d 688, 696 (Del. 2019) (internal quotation marks omitted).- 29

-

Act of 1933. 127 The Licensing Agreement also subjects token grants to “verification as an accredited investor, unless [User’s Board], in its discret ion, utilizes another valid exemption outside of, and separate from, its token offering under 506(c) such
as Rule 701 . . . .” 128 Because the Court’s role is to “give priority to the parties’ intentions as reflected in the four corners of the [A]greement,” 129 it is manifest from each Agreement that the parties intended to treat the ID Tokens a t each distribution as a security. Surely, it is not mere happenstance the parties included these references to SEC regulations in each Agreement. The Agreements were signed almost one month apart, the later

- signed Advisor Agreement doesn’t mimic the terms of License Agreement, and both Agreements include language the other does not. Most notably, the provisions referencing the SEC regulations are phrased differently i n each. This suggests nothing other than the parties deemed it prudent to include the regulatory compliance

127 Compl., Ex. B, Advisor Agreement; see also id. at Ex. A, License Agreement § 3.1(c)(iii) (“[T]he foregoing grants of tokens are subject to . . . (c) regulatory compliance including, but not l imited to, lock

- ups and restrictions, including but not limited to Rule 144 Restrictions . . . .”).

128 Id. , Ex. A, License Agreement § 3.1(c)(iii). Rule 506(c) is the S.E.C.’s “small business exempt offerings” rule that governs general solicitations and advertisements of a public offering. See U.S. S ECURITIES AND E XCHANGE C OMM ’ N , G ENERAL S OLICITATION

- R ULE 506( C ) (202 2), https://www.sec.gov/smallbusiness/exemptofferings/rule506c

.
129 In re Viking Pump, Inc. , 148 A.3d 633, 648 (Del. 2016) (internal quotation marks omitted).- 30

-

references in both Agreements and anticipated treating the ICO and forthcoming
distributions like th ose of a security.
I II . DAMAGES
“Under Delaware law, the standard remedy for breach of contract is based on the reasonable expectations of the parties that existed before or at the time of the
breach.” 130 It is well

- settled that breach of contract damages “ are designed to place the injured part y . . . in the same place as he would have been if the contract had been performed. Such damages should not act as a windfall.” 131 Accordingly, when assessing such damages, “the non

- breaching party is entitled to recover ‘damages that arise naturally from the breach or that were reasonably foreseeable at the time
the contract was made.’” 132
But in a case such as this

— where the damages were unforeseeable at the time of contracting and it cannot be determined what the Plaintiffs would have received
had the co ntract been performed

— how does the Court fashion a reasonable remedy
that accounts for: (1) the volatile and unregulated nature of cryptocurrency; (2) the express terms of the Agreements requiring immediate distribution of 25% of the total

130 Siga Tech., Inc. v. PharmAthene, Inc. , 132 A.3d 1108, 1132

- 33 (Del. 2015) (citing Duncan v. T heratx, Inc., 775 A.2d 1019, 1022 (Del. 2001)).

131 Paul v. Deloitte & Touche, LLP , 974 A.2d 140, 146 (Del. 2009).

132 Id. (quoting Tackett v. State Farm Fire & Cas. Ins. Co., 653 A.2d 254, 264

– 65 (Del.1995) ).- 31

-

token grant at t he ICO ( a concrete and discernible amount ) ; and (3) the remaining periodic token distributions whose values are so unpredictable that a blanket damages calculation indeed c ould operate as a windfall? The damages calculation here is two

- fold. First, the Court must find a reliable cryptocurrency valuation source to ensure the proper input of values. Then the Court must ascertain the proper method for calculating the damages such that it will place
the Plaintiffs in the same position they would have been had the Agreements been fully performed

. A. P ROPER V ALUATION S OURCE

– C OIN M ARKET C AP
The few courts that have endeavored to do so have found CoinMarketCap to
be a “reliable valuation tool ” for determining the USD value of cryptocurrency
tokens. 133 As one rightly observed, “ CoinMarketCap is used frequently by news publications to report on prices of virtual currencies, including publications that focus on virtual currencies such as CoinDesk and g eneral financial newspapers like
the Wall Street Journal and the Financial Times.” 134

133 CFTC v. McDonnell , 332 F. Supp. 3d 641, 670

– 71 (E.D.N.Y. 2018); CFTC v. Reynolds , 2021 WL 796683, at *4 n.2 (S.D.N.Y. Mar. 2, 2021) (citing McDonnell , 332 F. Supp. 3d at 670

– 71) (holding “CoinMarketCap is a reliable valuation tool for these purposes”) ; Hodges v. Harrison , 372 F. Supp. 3d 1 342, 1353 n.1 (S.D. Fla. 2019) (holding an evidentiary hearing “to determine the appropriate manner of calculating the value of Plaintiffs investments” before determining CoinMarketCap was a reliable source to convert cryptocurrency into USD).

134 McDonnel l , 332 F. Supp. 3d at 670

– 71.- 32

-

Tellingly, Congress’s proposed Digital Asset Market Structure and Investor
Protection Act encourag es the SEC and CFTC to publish joint rulemaking concerning digital asset classification

. 135 And in so doing, it nods to CoinMarketCap as “an appropriate publicly available website . . . that publishes” data on digital

assets. 136 Against this backdrop, t he Cou rt is satisfied CoinMarketCap is a reliable cryptocurrency valuation tool. As such, the Court will rely on historical pricing data published by CoinMarketCap to determine the proper USD value of ID Tokens in calculating the Plaintiffs’ forthcoming judgmen t

. B. P ROPER V ALUATION M ETHOD The Plaintiffs posit EverID’s failure to distribute the ID Tokens is analogous to Delaware’s “failure to deliver securities” cases, where damages are determined by the highest market price of the security within a reasonable time of a plaintiff’s discovery of the breach. 137

Just so

. But for the novelty of the subject instrument being units of cryptocurrency this suit mirror s a ny other failure to deliver securities case

— a run
135 Digital Asset Market Structure and Investor Protection Act, H.R. 4741, 117th Cong. (2021).

136 Id.

137 Pls.’ Mot. for Default J. ¶ 28 (citing Am. Gen. Corp. v. Cont’l Airlines Corp. , 622 A.2d 1 (Del. Ch. 1992)).- 33

-

of

- the

- mill action for Delaware courts

. The Court will, therefore, calculate the
Plaintiffs’ forthcoming judgment applying established Delaware precedent

. 1. Highest Value Within a Reasonable Time

. Known as the New York Rule, the “highest value within a reasonable time”
framework is a judicially

- created breach

- of

- contract remedy for reckoning “damages where stock or ‘properties of like character’ were converted, not delivered according to contractual or other legal obligation, or otherwise improperly manipulated.” 138 It’s frequently em ployed in wrongful stock conversion litigation and measures damages by: “t he highest intermediate value reached by the stock between the time of the wrongful act complained of and a reasonable time thereafter, to be allowed to the party injured to place hi mself in the position he would have been in had not his rights been violated. ” 139 This slight variation of the old English rule

— which measured damages by the highest value of the stock on or before the day of trial 140

— allows for a more just

138 Schultz v. CFTC , 716 F.2d 136, 141 (2d Cir. 1983) (citing McKinley v. Williams , 74 F. 94, 103 (8th Cir. 1896)).

139 Id. at 139

- 40 (quoting Galigher v. Jones , 129 U.S. 193, 200 (1889)); see also McKinley , 74 F. at 102

- 03 (holding the “true and just measure of damages” is “the highest intermediate value of the stock between the time of its conversion and a reasonable time after the owner has received notice of it to enable him to replace the stock”).

140 Galigher , 129 U.S. at 201.- 34

-

recovery. 141 The rule was modified in an effort to alleviate the drastic fluctuating
values of the asset

—

yet another a hardship borne by the victim

— since trial was an event that often occurred long after the conversion. 142 So i n the case of volatile

stock values, the modif

ication allows recovery for those “profits possibly lost as a result of the wrongful conduct.” 143 For practical reasons, the modified rule doesn’t require the injured party to
“reenter the market

. ” 144
The value of lost securities may rise dramatically the day after a wrongful conversion and then embark on a prolonged downward spiral. Had the owner of such securities not been wrongfully parted with them, he might well have been prompted to sell them within a few days, as their value began to plummet. To require him actually to reenter the market and repurchase the same securities as a predicate for a damage claim, when steadily falling prices render such an investment imprudent, would frustrate the rule which seeks to make an investor whole. Rather than mitigating damages, as this example illustrates, a requirement that there be an actual repurchase could result in an increase in damages. 145 But the rule is careful to avoid windfall awards to injured parties. Should the highest value occur after the stock has been converted, but before the injured party

141 Schultz , 716 F.2 d at 140.

142 Id.

143 Id.

144 Id.

145 Id. (emphasis in original).- 35

-

learns of the conversion, he cannot rely on that value for his damages. 146 No, the injured party’s “reasonable time” period begins after or upon the date the conversion
is discovered. 147 Accordingly, the measure of damages for wrongful conversion of stock or properties of like character is the higher value of either : “(1) its value at the time of conversion or (2) its highest intermediate value between notice of the conversion and a reasonable time thereafter during which the stock could have been replaced . . . .” 148
2. Delaware Follows the New York Rule

. Our Court of Chancery adopted the New York rule in American Gen. Corp. v. Continental Airlines Corp. , where it was asked to determine the value of damages for improperly converted stock options. 149 There, the plaintiffs recommended “a variation of the damage formula used in cases involving the conversion of securities of fluctuating value . . . [that is] based on the highest market price the stock reached within a reasonable time of plaintiff’s

146 Id. at 140

- 41.

147 Id. at 141.

148 Id. at 141.

149 622 A.2d 1 (Del. Ch. 1992).- 36

-

discovery of the breach.” 150 Th e c ourt accepted the recommended “highest market price of the stock” approach, but modified the amount because the date the plaintiffs used was arbitrary and self

- serving. 151 Instead, the c ourt used the date the plaintiff’s became absolutely entitled to be issued the options because that was the date the stockholders “approved the Employee Option” at issue in the litigation. 152

Now , “[w]hat constitutes a reasonable period of time is a question of law for
the court to determine.” 153 A plaintiff can’t cherry

- pick date s to trump up the
maxim al value

. 154 “Rather, the date should be established by resort to a ‘constructive replacement’ purchase by the plaintiff, i.e. , how long it would have taken the plaintiff to replace the securities on the open market.” 155 T wo or three months has been accepted as a reasonable period of time to replace an asset on the open market

. 156

150 Id. at 8.

151 Id. at 11

- 13.

152 Id. at 8, 14.

153 Segovia v. Equities First Holdings, LLC , 2008 WL 2251218, *21 (Del. Super. Ct. May 30, 2008).

154 Am. Gen. Corp , 622 A.2d at 13.

155 Id. (citing Madison Fund, Inc. v. Charter Co. , 427 F. Supp. 597, 609 (S.D.N.Y. 1977)).

156 Segovia, 2008 WL 2251218, at *22 (finding three months was appropriate for determ ining damages); see also Comrie v. Enterasys Networks, Inc. , 837 A.2d 1, 20 (Del. Ch. 2003) (calculating damages within a 90

- day period because the parties’ agreement gave the plaintiff ninety days from date of vesting to sell the disputed shares); Galighe r v. Jones , 129 U.S. 193, 199

- 200 (1889) (affirming two

- months ’ time was appropriate for calculating damages).- 37

-

C. A PPLICATION OF M ETHOD AND S OURCE
The Court is satisfied that the New York R ule is the proper method , and CoinMarketCap is the proper valuation source , to calculate the Plaintiffs’ damages. Too, the Court is satisfied this approach best represents the parties’ intent ions at the time of contracting

. 157 So Diamond Fortress’s and Mr. Hatcher’s damages will be calculated by multiplying the total tokens awarded under the respective Agreements by ID Tokens’ highest intermediate value within three months of the discovery of
EverID’s breach. Between the ICO date of February 8, 2021, and through March 4, 2021, th e Plaintiffs attempted to contact EverID to discuss then

- due token distributions and
obtain adequate assurances of payment. After hearing crickets , the Plaintiffs sent
their final communication to EverID o n March 4, 2021, declaring their intent to treat the Agreement as breached and to pursue legal remedies. March 4 is therefore the
date the P laintiffs became absolutely entitled to issu ance of their ID Tokens. Hence , the proper three

- month “reasonable time” period ran from March 4, 2021 , to June 3,
2021. CoinMarketCap recorded and published the daily values of ID Tokens during
that March 4, 2021 to June 3, 2021 span . The highest market price within that time

157 See Compl., Ex. A, License Agreement at § 3.1(c)(i) (containing unambiguous references to SEC regulatory compliance).- 38

-

period was recorded on April 9, 2021 , at a value of 2.01 USD

. 158 Conseque ntly , the Plaintiffs’ base damages are calculated as follows:



### D IAMOND 

### F ORTRESS 

### T ECHNOLOGIES 

### C HARLES 

### H ATCHER 

### , II
Total Tokens Awarded 10,000,000 2,500,000 Highest Value of ID Tokens from 3/4/2021

– 6/3/2021 $2.01 $2.01

TOTAL BASE DAMAGES TO BE AWARDED $20,100,000.00 $5,025,000.00

Plaintiffs are also awarded pre

- judgment interest on the above total figures, at the statutory rate accruing from March 4, 2021, the date they became absolutely entitled to the token distributions, until the entry date of this Opinion and Order

. 159
Plaintiffs are further ent itled to post

- judgment interest, again at the statutory rate, accruing as of the entry date of this Opinion and Order

. 160

158 Pls.’ Suppl. Submis sion in Supp. of Mot. for Default J., Ex. A, CoinMarketCap “Historical Data for Everest ” (https://coinmarketcap.com/currencies/everest/historical

- data/).

159 See D EL

. C ODE A NN

. tit. 6, § 2301 (2012) ; see also Brandywine Smyrna, Inc. v. Millennium Builders, LLC , 34 A.3d 482, 486 (Del. 2011) (holding that “ pre judgment interest in Delaware cases is awarded as a matter of right”).

160 See Wilmington Country Club v. Cowee , 747 A.2d 1087, 1097 (Del. 2000) (observing that post

- trial interest “is a right b elonging to the prevailing plaintiff and is not dependent upon the trial court’s discretion”).- 39

- IV. CONCLUSION
For reasons set forth herein , judgment for both Diamond Fortress and
Mr. Hatcher shall be entered accordin gly

. Within 20 days of entry of this Opinion
and Order , their counsel shall submit to the Court a proposed form of final judgment that incorporates the Court’s award, including pre

- and post

- judgment calculations.
IT IS SO ORDERED

.

_________________________ Paul R. Wallace, Judge Original to Prothonotary cc: All C ounsel via File & Serve