Ripple Hit With Lawsuit For Allegedly Selling Unregistered Securities

News | May 7, 2018 By:

Distributed ledger startup Ripple was hit by a lawsuit alleging that the company violated state and federal securities laws by selling its XRP tokens to the general public.

The lawsuit was filed by Ryan Coffey, represented by San Diego attorney James Taylor-Copeland, on Thursday in the Superior Court of California. The complaint alleges that Ripple, its subsidiary XRP II, and Ripple CEO Brad Garlinghouse have violated both the Securities Act and the California Corporations Code. Coffey is seeking unspecified damages and a declaration that Ripple and Garlinghouse sold unregistered securities to retail investors.

According to the complaint, Ripple created billions of tokens “out of thin air” and then profited by selling them to the public in “what is essentially a never-ending initial coin offering (ICO).”

“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”),” the suit claims. “In order to increase demand for XRP, and thereby increase the profits it can derive by selling XRP, Ripple Labs has consistently portrayed XRP as a good investment, relayed optimistic price predictions, and conflated Ripple Labs’ enterprise customers with usage of XRP.”

Coffey claims that he purchased 650 XRP on January 5 and sold it on January 18 of this year for USDT, which he then exchanged for USD, sustaining a loss of around 32 percent, or $551.89.

“XRP purchasers reasonably expected to derive profits from their ownership of XRP, and Defendants themselves have frequently highlighted this profit motive,” the complaint said. “Given its reliance on sales of XRP, it is unsurprising that Ripple Labs aggressively markets XRP to drive demand, increase XRP’s price, and thus its own profits.”

Ripple spokesman Tom Channick said in an emailed statement that whether or not XRP is a security is for the US Securities and Exchange Commission (SEC) to decide. He added that they continue to believe XRP should not be classified as a security.

The SEC has yet to officially announce whether cryptocurrencies such as XRP are considered securities. But the agency has opened probes into dozens of ICOs to determine whether they constitute unregistered securities offerings. In March, SEC Chairman Jay Clayton said that every ICO token he has observed is a security, though he clarified that bitcoin and other “pure” mediums of exchange are exempt from that classification.

Last month, Gary Gensler, the former chairman of the Commodity Futures Trading Commission, said that government officials should take a closer look at the largest coins by market capitalization, not just at tokens sold in ICOs. He added that ethereum’s ether and Ripple’s XRP could probably be classified as securities.