A recent dispute between a token warrant issuer and an investor underscores the importance of accurately defining conversion mechanics in token warrants. Most token warrants tie an investor’s token allocation to such investor’s equity stake in the company, as calculated based on a particular investment or the investor’s aggregate shareholdings. The distinction is crucial.
On October 8, 2025, Chain Technologies Research, d/b/a “Plasma,” filed a declaratory judgment action in the U.S. District Court for the District of Delaware against several Mercury investment vehicles, seeking to confirm the meaning of its token warrant and foreclose what Plasma characterizes as an attempt to extract an outsized token allocation based on a drafting error.
Overview of Facts Alleged in the Complaint
Plaintiff is Plasma, a Cayman Islands company based in the U.K. Defendants are Mercury Fund IV, L.P.; Mercury Fund Affiliates IV, L.P.; Mercury Fund V, L.P.; Mercury Fund Affiliates V, L.P.; and Mercury Fund Executives V, L.P., each a Delaware LP based in Houston.
In September 2024, the Mercury IV Funds invested $100,000 via SAFEs and simultaneously received a Plasma Token Warrant. Plasma alleges the warrant was meant to tie token purchase rights solely to contemporaneous SAFE investments, a common approach in early-stage digital asset financings.
Plasma argues the Token Warrant included a “significant drafting error.” The original warrant defined “Pro Rata Portion” by reference to a holder’s total equity, including pre-existing shares, which Plasma says was an obvious mistake inconsistent with the parties’ intent to reward only new SAFE capital, not legacy ownership (e.g., equity Mercury IV Funds received through Plasma’s acquisition of a Mercury IV Funds portfolio company).
Key Legal Issues
Amendment Authority and Retroactivity
The warrant’s Section 8.6 permits amendments “retroactively or prospectively” with written consent of Plasma and the “Majority Holders,” provided the amendment applies to all holders the same way. Plasma contends this provision is enforceable under Cayman Islands law (the warrant’s governing law).
After discovering the issue, Plasma’s board authorized, and a majority of holders approved, an amendment on August 1, 2025, redefining “Pro Rata Portion” to look only to shares issuable on conversion of SAFEs. Plasma asserts this amendment cured the drafting mistake of its prior counsel.
Waiver and Release
Plasma notified holders of a Token Structuring Event on August 6–7, 2025, offering Mercury Fund Affiliates IV 431,198 XPL and Mercury Fund IV 12,068,707 XPL based on their SAFE allocations. On August 11, 2025, both Mercury IV Funds exercised, and, according to Plasma, executed waivers and releases of all known and unknown claims relating to the warrant and token launch, language Plasma asserts is enforceable under Cayman law.
Declaratory Relief and Mistake Doctrine
Plasma seeks declarations that the amendment is valid, or alternatively that the original total-equity formulation is void or unenforceable under mistake doctrines recognized by Cayman law, and that the Mercury IV Funds’ releases bar their claims.
Relief Sought
Plasma alleges Defendants demand roughly 291 million additional XPL tokens by counting total equity holdings (including secondary purchases by Mercury V Funds), despite a sub-penny “strike price” and market pricing near $0.98—an alleged $273 million windfall on a $100,000 SAFE investment.
Plasma asks the court to declare that:
- The August 1, 2025 amendment is valid (or the prior term is void/unenforceable for mistake).
- The Mercury IV Funds released/waived any claims relating to the warrant and token launch.
- Mercury Fund IV is entitled to no more than 12,068,707 XPL; Mercury Fund Affiliates IV to no more than 431,198 XPL.
- The Mercury V Funds have no rights to purchase XPL under the warrant because they are not parties or holders.
Why It Matters
The case tests the enforceability of majority-amendment and retroactivity clauses under Cayman law in token warrant instruments, the availability of rectification/mistake doctrines for crypto-related contracts, and the effect of broad claim releases tied to token exercises. It also highlights the SAFE-plus-token-warrant paradigm and allocation mechanics in high-velocity token launches, where a scrivener’s error can have multi-hundred-million-dollar implications for cap tables and token economics.
Fundraising is one of the busiest times for an emerging company and founders are being pulled in many different directions. This case serves as a reminder issuers of token warrants would do well to double-check the conversion mechanisms in their agreements are accurately defined.