Class Action Lawsuit Against Ripple Alleges Sale Of Unregistered Securities

by: The Knowledge Group

May 11, 2018


A disgruntled investor recently filed a class action against Ripple Labs, represented by Taylor-Copeland, a firm focusing on financial technology.

Goals of the Suit

The lead plaintiff bought and sold 650 of Ripple’s XRP tokens in January 2018, sustaining a net loss of $551.89 (32%) by the time the coins’ value translated back into dollars. The case, filed on behalf of all XRP investors over the past five years, targets Ripple, its CEO, and its subsidiary XRP II. The lawsuit claims the defendants have “earned massive profits” by selling off tokens to the general public in an endless “initial coin offering” to pump up demand.

The suit notes that Ripple Labs has consistently conveyed optimistic predictions that its buyers relied on.

The suit seeks attorneys’ fees, court costs, and punitive damages. It also seeks a court declaration that XRP offerings involve an unregistered securities sale, and asks the court to stop the company from violating the federal Securities Act and California’s Corporations Code.

Ripple Effects

Recent reporting by the Wall Street Journal indicates that the Commodity Futures Trading Commission (CFTC) along with the Securities and Exchange Commission (SEC) are deliberating on whether initial coin offering tokens—and indeed, many digital currencies so popular today among a growing group of smartphone-using buyers—constitute securities, subject to federal oversight.

One factor that could tip the scales to a securities classification is centralization—such that a coin’s creator and managers can influence performance.

So, if you want to challenge digital currency’s legitimacy, maybe Ripple is a perfect target. The company itself decides which nodes validate Ripple transactions. But with Bitcoin and other digital assets, anyone can run the software to validate transactions. Given Ripple’s centralized model, the SEC wouldn’t have to stretch far to deem it a security. Ripple has proved appealing to large banks as a channel for transferring wealth.

In contrast, the pioneer of cryptographically supported assets, Bitcoin, is so effectively decentralized that its creator cannot even be identified.

Watch this space, as we continue examining key legal events in the world of financial technology. We will be discussing Initial Coin Offerings and the SEC’s probes on an upcoming webcast on June 19th, you can find the details by clicking here.  This webcast will also be eligible for Continuing Legal Education (CLE) credit.  We hope to see you there!