Investors in Ripple’s XRP Rely on SEC Guidance To Claim It Was An ‘Unregistered Security’

September 27, 2019 | Digital Assets
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Investors amended their complaint in a May 2018 lawsuit regarding the XRP cryptocurrency, relying on SEC’s guidance on digital assets.

The SEC’s Framework for “Investment Contract” Analysis of Digital Assets has given a group of plaintiffs more power to their elbow in a May 2018 lawsuit regarding the XRP cryptocurrency.

The investors have further amended their complaint based on the Framework. The amended complaint reinforces their contention that they were illegally sold XRP, a digital cryptocurrency, as an unregistered security.

XRP cryptocurrency is a security

The May 2018 lawsuit set out to prove that XRP was a security, no less.

It relied on the Howey decision in the U.S. Supreme Court and associated case law to prove the existence of an “investment contract,” via the following tests:

  1. Investment of money
  2. In a common enterprise
  3. With a reasonable expectation of profits
  4. Derived from the efforts of others (e.g., a promoter or other third party).

Amended filing

The plaintiffs have now dissected the SEC’s Framework and offered a point-by-point analysis to bolster their claim against Ripple that its sales of XRP cryptocurrency constituted illegal sales of unregistered securities.

The comparison, therefore, maps the relevant section of the Framework to the plaintiffs’ allegations to prove that XRP qualified as a “security.”

Economic reality

Meanwhile, the plaintiffs also supported their arguments regarding “the economic reality of the transaction,” a test detailed in Para II (3) of the Framework.

Further, a seven-element analysis of economic reality checked all of them as ‘No.’

[While none are determinative, the more these elements are true for a given digital asset, the less likely it is to satisfy the Howey test (i.e., less likely to fall under the SEC definition of an “investment contract.”]

Finally, investor Ryan Coffey filed the suit in May 2018 seeking class-action status against Ripple Labs, subsidiary XRP II, CEO Brad Garlinghouse and other individuals. However, investors Vladi Zakinov, Avner Greenwald and David Oconer filed similar suits later. They claimed XRP qualifies as a security.

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