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Word On The Street

Hot Seat: Ripple

It’s all fun and games until your company gets hit with a class action lawsuit. The lawsuit was filed by San Diego resident Ryan Coffey, who claims that the sale of XRP tokens violated security laws and that the creation and subsequent marketing of XRP enabled the defendants to earn “massive profits by quietly selling off this XRP to the general public.”

Before we dive in, let’s review the alleged defendants:

Ripple Labs Inc (created 100

Brad Garlinghouse (Ripple CEO)

XRP II LLC (Ripple subsidiary)

Ten related individuals

We’ve heard this tale before. Companies that failed to register as security tokens during their token sale cut corners with the SEC and are subject to future penalties and procedures. However, what’s interesting here is the amount of XRP tokens maintained by Ripple Labs and the alleged sale of those tokens as prices appreciated in late 2017/early 2018.

And Ripple received flak last week in the UK. Evidence was presented by Martin Walker, a non-profit Banking and Finance director, and Izabella Kaminska, an FT Alphaville editor, that suggested Ripple intentionally clouded the relations between the company and their tokens. The red flags are quoted as follows:

Investment classes that have little or no possibility of generating a positive return, except for investors who benefit from arrival of new investors bringing in additional funds.

Layers of complexity to hide the true nature, risks, revenue streams, or beneficial owners of investments.

Structured to deliberately avoid (or attempt to avoid) the application of existing laws and regulations.

Highly asymmetric information between investors and the organizers/beneficiaries of the scheme.

“No Direct Connection”

That’s a segment of a quote delivered from Ryan Zagone, Ripple’s director of regulatory relation, in response to allegations from Walker that XRP tokens have no value and, in fact, add another layer of complexity to the exchange process.

Which, if we’re being honest, is fishy. Zagone’s full statement is “We didn’t create XRP… What we do have is we do own a significant amount of XRP, it was gifted to us by some of the open-source developers that created it. But there’s not a direct connection between Ripple the company and XRP.”

That seems to discount the 55 billion XRP held in escrow by Ripple Labs and the instructions on Ripple’s website on how to buy XRP tokens.

The bottom line: Leave it to the SEC to decide. With the hearing regarding Ethereum taking place at 9AM this morning, we’ll have a better understanding of what direction the suit will be headed once it concludes.