P Xenos and M Bacina
Lawsuit alleging Ripple’s XRP is unregistered security strides forward
The Court of the Northern District of California has decided to allow a lawsuit alleging that Ripple’s XRP crypto asset is an unregistered security.
Orders released by Judge Phyllis Hamilton of the Court of the Northern District of California ruled to only partially grant Ripple’s motion to dismiss the lawsuit against it.
The lawsuit was ignited by Bradley Sostack in August 2019 as a class action on behalf of all those who purchased Ripple XRP tokens issued and sold by Ripple during their intial coin offering. He alleges that the firm conducted an unlawful scheme to raise hundreds of millions of dollars through sales of XRP (an alleged unregistered security) to retail investors in violation of the registration provisions of US federal and state securities laws.
Ripple filed a motion to dismiss the lawsuit in September of 2019, claiming the case was not brought forward in a timely manner, and that:
Were Plaintiff allowed to belatedly challenge the classification of XRP, it would not only threaten to eliminate XRP’s utility as a currency, but it would upend and threaten to destroy the established XRP market more broadly
Ripple's attempt to have the case thrown out on grounds including that there was no case for an allegation of an unregistered securities offering didn't succeed, and while Judge Phyllis Hamilton dismissed Ripple’s claims that the plaintiff failed to act in a timely manner. She approved Ripple's motions to dismiss claims of false advertising and claims of personal liability against Ripple’s CEO Brad Garlinghouse. The lawsuit is set to continue based on the allegation that Ripple’s XRP crypto asset is an unregistered security under US law.
Her Honour found that due to Ripple:
publishing various tweets, interviews, and articles pushing the adoption of XRP;
hosting conferences concerning XRP’s use;
explaining on its website how to purchase XRP;
including a link to cryptocurrency exchanges for such purchases, and;
lobbying Congress and the SEC to adopt cryptocurrency friendly laws
there was a sufficient basis for the allegations brought, and the case should not be dismissed. Her Honour said:
the allegations set forth in the Complaint plausibly allege that both [defendants] engaged in steps necessary to the distribution of the unregistered security
This case echoes that of the Kik matter in early June 2019, where the Securities Exchange Commission sued Kik for conducting an illegal $100 million initial coin offering. The SEC sought a permanent injunction, disgorgement plus interest, and a penalty. Following the charges, the price of KIN collapsed nearly 90%.
While Ripple seeks to curate a reputation as a banking and payments focused company, this lawsuit remains a shadow over those plans and seems set to continue for some time.