(CN) – Shareholders claim in a class action that Ripple Labs Inc. and its subsidiary, XRP II LLP, sold unregistered securities to investors by creating 100 billion tokens of cryptocurrency “out of thin air.”
Lead plaintiff Avner Greenwald filed the complaint in the Superior Court of California for San Mateo County. Ripple Labs is a technology company that produces the cryptocurrency “Ripple.” Ripple, also known as “XRP” is a cryptocurrency that can serve as a “bridge currency,” which can be used if no direct exchange is available between two other currencies.
Ripple Labs’ website touts itself as the future of global payments.
“In a world where three billion people are connected online, cars drive themselves and appliances can communicate, global payments are still stuck in the disco era,” according to the site.
According to the complaint, 20 percent of the 100 billion tokens of XRP were given to the original founders of Ripple Labs and the remaining 80 percent were retained by Ripple Labs, which has generated lucrative revenue from nothing, according to the complaint.
“Defendants have since earned massive profits by selling the retained XRP to the public without complying with federal securities laws, in what is essentially an ongoing initial coin offering (“ICO”),” the complaint states. “Like an initial public offering (“IPO”), in an ICO, digital assets are sold to consumers in exchange for legal tender or other cryptocurrencies.”
Because the sale of XRP is used to fund company operations, Ripple Labs has greatly increased efforts in offering XRP, touting it as a good investment despite the lack of compliance with securities law, according to the complaint.
The class claims XRP is unlike other cryptocurrencies such as Bitcoin, because other cryptocurrencies are “mined and created by those validating transactions on their network,” whereas all 100 billion XRP tokens were created from nothing.
Through advertising and promoting on Twitter, Ripple Labs made public statements about a commitment to limiting the supply of XRP, which had an explosive, positive effect on the value of the cryptocurrency. The price of XRP rapidly shot up over the course of one month, from approximately $0.22 per token in December to $3.38 per token in January, according to the complaint.
A market downturn of XRP loomed, however, following explosive growth at the end of 2017. In three months, the value of XRP fell to a low of roughly $0.48 per token on April 6, 2018.
Market participants purchased over $16 million worth of XRP directly from the company in the first quarter of 2018.
During that time, defendants were cashing out, according to the action.
“Defendants sold at least $167.7 million worth of XRP between January 1, 2018 and March 31, 2018,” the complaint states. “Given its reliance on sales of XRP to fund its operations, it is unsurprising the Ripple Labs aggressively markets XRP to drive demand, increase the price of XRP, and consequently, its own profits.”
Ripple Labs’ failure to register its cryptocurrency tokens with the SEC violates the Securities and Exchange Act, the class claims..
Investors are represented by John T. Jasnoch, Thomas L. Laughlin, IV, and Rhiana Swartz of Scott & Scott Attorneys at Law in New York.