Terraform Labs Facing Class Action After May 2022 terraUSD, Luna Collapse

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Terraform Labs Pte. Ltd. and a group of venture capital firms face a proposed class action lawsuit that alleges they sold unregistered securities and misled investors with regard to the stability of Terraform’s two largest digital assets, terraUSD (UST) and Luna.

The 72-page lawsuit says that investors in the defendants’ purported “stablecoin” and sister cryptocurrency lost billions of dollars when the truth about the instability and unsustainability of UST and Luna was revealed in early May 2022, which preceded a mass sell-off that ultimately saw the price of the two assets collapse by 91 and 99.7 percent, respectively.

The suit alleges that Terraform, who operates the Terra blockchain upon which its decentralized financial products are developed and supported, and CEO Do Kwon have essentially sold unregistered securities while misleading investors about the stability of the products, which include native and governance tokens, stablecoins, mirrored assets, liquidity pool tokens, bonded assets and the Anchor protocol, a purportedly high-yield savings protocol.

Per the case, many of Terraform’s projects bear “all the hallmarks” of investment contracts, which are essentially securities, yet were never registered as such with the Securities and Exchange Commission (SEC).

According to the complaint, the defendants “took advantage of the market’s lack of understanding and awareness” of how the Terra-related projects operated, leaving many investors unaware that the assets were unregistered securities.

The suit goes on to allege that the defendants misrepresented the stability of terraUSD, Luna and Anchor, a savings protocol on the Terra blockchain.

The lawsuit says that Terraform assured investors that the Luna Foundation Guard, a group comprised of the venture capital firms Jump Crypto, Tribe Capital, Republic Capital, GSR, DeFinance Capital, and Three Arrows Capital, would adequately fund and support the Terra ecosystem and ensure terraUSD would always be worth $1.

Despite these representations, however, the price of the token collapsed in May 2022 during a mass sell-off that saw UST’s value drop by 91 percent, the lawsuit relays. Similarly, the price of Luna, Terraform’s native digital asset to which UST was tied, also dropped to almost zero amid what the complaint describes as a “death spiral” that saw the entire Terra ecosystem come crashing down to the tune of billions in losses, the case says.

According to the suit, Terraform is under investigation by the SEC for, among other allegations, selling mirrored assets and the MIR token as unregistered securities. 

The suit looks to represent anyone who purchased Terraform’s digital assets and financial products between May 20, 2021 and May 25, 2022 and was damaged thereby.

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