Unregistered Sale of Alleged XRP Securities
On May 3, 2018, class action was filed against Ripple Labs, Inc., its wholly owned subsidiary XRP II, LLC, Mr. Bradley Garlinghouse (Ripple Labs Inc. CEO) and other 10 unidentified individuals, corporations, companies, partnerships or other business entities that were supposed to be conspirators with, or alter egos of, other defendants.
The class action was filed pursuant to California Code of Civil Procedure on behalf of regular investor, Mr. Ryan Coffey, and on behalf of all others similarly situated. Mr. Coffey is claiming to buy 650 XRP on January 6, 2018 at a price of USD 2,6 and selling 649,98 XRP on January 18, 2018 at a price of approximately USDT (Tether) 1,7, sustaining a loss of approximately USD 551,89.
The causes of action being (i) unregistered offer and sale of securities in violation of Sections 5 and 12(a)(1) of the Securities Act; (ii) unregistered offer and sale of securities in violation of California Corporation Code Sections 25110 and 25503; (iii) violations of Section 15 of the Securities Act (only against Ripple Labs Inc. and Brad Garlinghouse); and (iv) violation of Section 25504 of the California Corporations Code (only against Ripple Labs Inc. and Brad Garlinghouse).
The claim stands on the following allegations of the plaintiff:
- All 100 billion XRP were created (in words of the claim: “out of thin air”) by Ripple Labs in 2013, out of which 20% were given to the individual founders of Ripple Labs Inc. (Chris Larsen, Jed McCaleb and Arthur Britto) and 80% were retained by the Ripple Labs Inc. Ripple Labs Inc. planned from the very beginning to sell these pre-mined XRP to finance its operation and improvement of XRP Ledger. The defendants are in fact carrying out this “never ending ICO” ever since, aiming directly at large investors and at general public (through XRP sales on cryptocurrency exchanges).
- Taking into account the XRP Markets Reports defendants` primary source of income is the sale of XRP, not the activities relating to Ripple Enterprise Solutions (xCurrent, xRapid and xVia).
- Defendants market XRP to drive demand and increase its price by e.g. providing online instructions, how to buy XRP; reporting on XRP market performance and adoption of XRP by cryptocurrency exchanges; various Mr. Garlinghouse`s public statements promoting long term holding of XRP; blurring distinction between the Ripple Enterprise Solution and XRP; Ripple Labs Inc. attempting to pay Coinbase and Gemini crypto exchanges for listing XRP; limiting XRP supply by placing 55 billion XRP into a cryptographically-secured escrow account. Most of these events being documented by defendants public statements and correlated rise of XRP price.
- Defendants acknowledging that development of the XRP Ledger is dependent on their technical, entrepreneurial and managerial efforts, e.g. by promoting deal with BitGo to build an enterprise wallet for XRP; announcing plans on improving XRP liquidity and the XRP Ledger; entering into partnership with MoneyGram to use xRapid and XRP; promising 5 Billion XRP option to R3 Holdco, LLC, a well-known enterprise software firm focused on DLT, to drive adoption of XRP.
- Ripple Labs Inc. maintaining the centralized XRP Ledger by hosting five Ripple Labs Inc. nodes, which are the only trusted nodes creating the network; releasing updates ot XRP Ledger; owning the github.com/ripple/rippled repository; paying bounties for discovering bugs in their software.
Based on the above allegations the claim briefly summarizes the reasons for XRP being a security, apparently more or less in line with the notoriously know Howey test The reasons being that:
- XRP purchasers made and investment of money in a common enterprise. The profits of investors in XRP are intertwined with those of all other purchasers and with the fortunes of Ripple Labs Inc.
- XRP investors had a reasonable expectation of profits.
- The success of XRP requires efforts of the defendants, the plaintiffs being entirely passive in respect of the XRP success and the Ripple Labs Inc. exercising near complete control over the XRP Ledger.
Contrary to the above allegations, it is expected that the defendants may claim among other things, that the Ripple Labs Inc. in fact did not create the XRP open-source protocol, the defendants indeed did not sell XRP to most of the plaintiffs, that XRP is in fact going to be used for paying fees within the Ripple Enterprise Solutions and that XRP has indeed real utility driven forward also at large by its users (investors). Whatever will be the outcome of this litigation, it will certainly be an interesting piece into the current token/security puzzle.