A collective lawsuit was filed against Ripple Labs a few days ago at the Superior Court of San Francisco. The lawsuit accused the company of offering and selling non registered securities and other violations of the United States securities acts.
The lawsuit was filed by Ryan Coffey in his own name and in the names of all the investors that bought the XRP token emitted and sold by Ripple. Coffey is represented by Taylor-Copeland Law firm. According to the website of this law firm, it is one of the first such firms in the United States of America to focus on legislation related to the blockchain technology and the cryptocurrencies.
Coffey bought 650 XRP tokens on January 6th this year at the price of 2.60 US dollars per coin and sold them on January 18th at the price of 1.70 dollars per coin. In the lawsuit, the plaintiff alleges that the defendant obtained massive earnings by violating both the state and federal securities acts. The lawsuit states that by offering and selling the XRP tokens to the public, the company essentially organized an initial coin offering (ICO) which never concludes. The plaintiff also alleges that the XRP tokens have all the characteristics of a security, which the company tries to hide by selling it through cryptocurrency exchanges and not directly.
One of the arguments presented by Coffey in the lawsuit against Ripple Labs is the fact that the XRP tokens are not mined. Instead, they are part of an emission of 100 billion XRP tokens created by Ripple Labs in 2013, out of which 20% of the tokens were held by the company and meant to be distributed between its founders.
In the United States the majority of the legal discussions related to the cryptocurrencies are concentrated on the ICOs and especially on the question whether the tokens sold through these campaigns are securities or not.
If these tokens are not securities, then no illegal actions are taken here. On the other hand, if a token is considered to be a security according to the Howey test, it would be treated by the laws regulating the emission of securities in the United States of America. The United States Securities and Exchange Commission (SEC) recently issued a statement saying that not all the initial coin offerings were illegal and that if a particular token is a security today, it can stop being a security tomorrow.
The main argument in the lawsuit against Ripple Labs is based on the claim that the XRP tokens are securities and the plaintiff insists on qualifying the sale of these tokens as non-registered: “This is a securities class action on behalf of all investors who purchased Ripple tokens (“XRP”) issued and sold by Defendants. It arises out of a scheme by Defendants to raise hundreds of millions of dollars through the unregistered sale of XRP to retail investors in violation of the registration provisions of state and federal securities laws.
Unlike cryptocurrencies such as Bitcoin and Ethereum, which are mined by those validating transactions on their networks, all 100 billion of the XRP in existence were created out of thin air by Ripple Labs at its inception in 2013. In other words, unlike some virtual currencies,XRP was fully generated prior to its distribution. 20 billion XRP, or 20 percent of the total XRP supply, were given to the individual founders of Ripple Labs, with the remaining 80 billion retained by Ripple Labs.
Defendants have since earned massive profits by quietly selling off this XRP to the general public, in what is essentially a never-ending initial coin offering (“ICO”). Like the better known initial public offering (“IPO”), in an ICO, digital assets are sold to consumers in exchange for legal tender or cryptocurrencies (most often Bitcoin and Ethereum). These tokens generally give the purchaser various rights on the blockchain network and resemble the shares of a company sold to investors in an IPO. Unfortunately, these ICOs have become a magnet for unscrupulous practices and fraud.”
The modest loss suffered by Coffey from his investment in XRP is insignificant when compared to the costs of the aforementioned lawsuit, which makes one suppose that there is a well calculated legal strategy behind this lawsuit. Besides recovering the 585 dollars that the plaintiff lost as a result of his investment, this lawsuit might have another objective and that is to acquire a multi million amount as compensation if the court established that the tokens are securities. This could present a loss on a medium term for the future ICOs, at least in the state of California.