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Unikrn was one of the Seattle 10 companies in 2015, recognizing its status as one of the region’s most promising startups. (GeekWire Photo / Kevin Lisota)

Unikrn, the Seattle-area esports betting startup, is being sued on allegations that the company skirted federal regulations during its initial coin offering last year.

ICOs are an increasingly popular and controversial way for companies typically in the blockchain and cryptocurrency arenas to raise money. Anyone — not just accredited investors — can buy tokens to be redeemed for items on the company’s platform or converted to more mainstream cryptocurrencies like Bitcoin and Ethereum.

Unikrn CEO Rahul Sood. (Unikrn Photo)

The plaintiff in this case, Las Vegas resident John Hastings, put 10 Ethereum into Unikrn’s ICO last September, which would have been worth about $2,800 that day, according to CoinMarketCap. This week, Hastings filed a lawsuit in King County Superior Court seeking class action status against Unikrn; a Bermuda subsidiary of the company; CEO Rahul Sood, a former general manager of Microsoft’s investment arm; and Chief Marketing Officer Karl Flores.

Sood said Unikrn is aware of the lawsuit and has retained Seattle firm Perkins Coie to “vigorously defend” the company. Sood and Jean-Jacques Cabou, a partner at Perkins Coie, declined to comment on the specifics of the case. Sood said the company will keep its head down “building the most amazing blockchain-powered esports experiences on Earth. We are focused on that, even in the face of meritless litigation like this.”

In the lawsuit, Hastings alleges that Unikrn attempted to avoid federal securities laws by claiming its currency represented a “utility token” — essentially a digital coupon that could be exchanged for services and items on the company’s platform — rather than an investment intended to bring profit for buyers.

“Defendants have crafted a flimsy façade that UKG Tokens are not securities by claiming they are utility tokens,” according to the suit. Hastings goes on to argue that “in reality, the UnikoinGold ICO was an offer and sale of securities. Indeed, it is evident that investors were purchasing UKG Tokens with the expectation that those tokens would increase in value and become worth more than the virtual currencies invested.”

Unikrn raised $31 million in the ICO this past October for UnikoinGold, a cryptocurrency created by the company that can be used on its platform to bet on esports matches. Participants included Unikrn investor Mark Cuban and Ethereum co-founder Anthony Diiorio, who sits on Unikrn’s advisory board.

Sood previously broke down the difference between investing in an ICO versus taking venture funding in an interview with GeekWire, and his comments point more toward the utility of the token rather than its value as an investment.

“Venture funding is when you sell a piece of equity to a venture fund,” Sood explained at the time. “Token sales are when you sell a token that works on your platform. It’s not an investment because it’s completely liquid. It’s almost like you are buying a specific currency that you can trade with and use on our platform.”

Hastings in his lawsuit cites several statements from executives that he argues point to the acknowledgment of the currency as an investment. UnikoinGold is listed on major exchanges giving it a price in U.S. dollars, which has dropped from $0.30 when the Unikrn ICO began last year and its value has fallen to just under a nickel.

In addition to its ICO, Unikrn has also raised $10 million in venture funding from Cuban and others like Ashton Kutcher, Binary Capital, and Indicator Ventures. The company employs about 90 people in offices in Seattle, Berlin, Sydney, and Las Vegas. It was named a Seattle 10 startup in 2015, recognizing its status as one of the region’s most promising startups.

Unikrn has been busy in recent months, building out a new back-end blockchain called Unikrn Jet that promises to speed up transaction times and power live betting across major esport titles. Unikrn is also working on an interface that makes it easier to buy its cryptocurrency and is close to securing a license to allow cryptocurrency betting across multiple countries.

Unikrn lawsuit by Nat Levy on Scribd

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