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A class action lawsuit was filed on May 3rd against
Ripple Labs Inc.—a fintech startup that controls the
third-largest cryptocurrency in the world—and its CEO Brad
Garlinghouse, alleging that Ripple sold unregistered, non-exempt
securities in violation of federal and California state securities
laws.
In their complaint, Plaintiffs characterized the sale
of XRP (Ripple's native token) as "a scheme by Defendants
to raise hundreds of millions of dollars through the unregistered
sale of XRP" and "what is essentially a never-ending
initial coin offering (ICO)." In addition to attorney fees,
costs of the suit, and punitive damages, the plaintiffs also
request a declaration from the court that the sale of XRP is an
unregistered securities sale and to enjoin defendants from further
violating securities laws.
Plaintiffs alleged facts that correspond to the elements of the
Howey test for determining whether an instrument qualifies
as an "investment contract," and thus, as security, under
the federal securities laws. Specifically, the complaint states
that XRP purchasers (1) made an investment of money, (2) in a
common enterprise, (3) with a reasonable expectation of profits (4)
derived predominantly from the essential managerial or
entrepreneurial efforts of others.
This lawsuit comes in the wake of heightened SEC
scrutiny of cryptoasset token issuances. As we've
noted, SEC Chairman Jay Clayton has said in recent months that
he has not seen a single token issued through an ICO that is not a
security.
Ripple's prominent position within the blockchain ecosystem,
the relationship between XRP tokens and Ripple's enterprise
software, and the manner in which their tokens are distributed
could form the basis for tremendously impactful judicial precedent
with respect to ICOs.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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