Class Action Alleges Ripple Labs’ ‘Never-Ending’ Initial Coin Offering Violates Securities Laws

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Ripple Labs, Inc., its CEO, and XRP II, LLC are the defendants in a proposed class action lawsuit that seeks to represent all investors who bought Ripple tokens (XRP) through an alleged scheme the case charges amounts to an unregistered sale of securities.

In the constantly shifting world of cryptocurrencies, Ripple’s XRP tokens stand out from more well-known offerings like Bitcoin and Ethereum in that they, instead of being mined by those validating transactions on the networks, were “created out of thin air” at the company’s inception in 2013, the complaint reads. According to the case, Ripple’s fully-formed beginnings allowed for 20 billion XRP—or 20 percent of the total XRP supply—to land in the hands of Ripple Labs’ individual founders, with the rest remaining in possession of the company.

Since its 2013 birth, Ripple Labs has yielded substantial profits by “quietly” selling its XRP to the general public in what the lawsuit pegs as essentially a “never-ending initial coin offering” (ICO) that has “accelerated rapidly” over the past year. The plaintiff alleges that to continue to drive up XRP’s value, the defendants have positioned the cryptocurrency as a sound investment aided by distribution strategies that will result in “stable or strengthening” exchange rates when compared to other currencies. From the complaint:

“Like the better-known initial public offering (‘IPO’), in an ICO, digital assets are sold to consumers in exchange for legal tender or cryptocurrencies (most often Bitcoin and Ethereum). These tokens generally give the purchaser various rights on the blockchain network and resemble the shares of a company sold to investors in an IPO. Unfortunately, these ICOs have become a magnet for unscrupulous practices and fraud.”

According to the complaint, the U.S. Securities and Exchange Commission (SEC) has made clear that digital tokens such as XRP often constitute securities and therefore may not be lawfully sold without proper registration or exemptions from registration. Ripple Labs’ XRP token, the lawsuit argues, embodies all the traditional hallmarks of a security, from up-front considerations to reasonably expected profits derived from ownership of the token. Many of the defendants’ representations with regard to XRP were “designed to drive demand of XRP,” the lawsuit states, allowing Ripple Labs to bring in greater returns on its crypto-coin sales. 

According to the lawsuit, Ripple Labs, as of April 2018, still holds at least 60.83 billion of the XRP in circulation.