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Ripple Can Be Defined as Securities

The new lawsuit filed by investors against Ripple is based on the amended version of the SEC’s guidance on cryptocurrencies and has good chances for success. Moreover, the XRP token can be qualified as a security.

The amended complaint, filed Aug. 5 in a year-old lawsuit against Ripple, includes several new arguments aiming to confirm that Ripple had violated the Security Law as the company was trading XRP. It is the first lawsuit to the fillings of which Ripple has to respond directly by addressing the facts of the case. The company has until September 19 to submit the response. The four previous complaints filed in California have been consolidated and shifted to federal court.

According to Jake Chervinsky, it is “a strong case against Ripple”, which is, moreover, supported by Susman Godfrey, “one of the best plaintiff’s law firms in the U.S.” He also noted that the document contains the details on why XRP should be qualified as a security at the federal level, and in California

“This is important because California uses the ‘risk capital test’ in addition to the [federal] Howey test to determine whether a transaction qualifies as a security,” he explained. “The risk capital test is broader than the Howey test, meaning the plaintiffs could lose their federal securities claims and still win their state securities claims.”

The plaintiffs are trying to tie the XRP Ledger, a distributed network underlying XRP, to Ripple.


Perhaps the most important difference between the new complaint and its predecessors is the citation of the SEC’s framework for analyzing whether a digital asset qualifies as a security.

“Although the SEC’s Framework is technically only non-binding guidance, the Court will likely give it significant weight in deciding how to apply the Howey test to the facts of this case.”

Rebecca Rettig, a partner at the law firm of Fisher Broyles, which is not involved in the case, reported that the SEC’s Framework will be applied in federal court for the first time ever. She said:

“Although the framework on its own doesn’t have precedential value – meaning the court is not required to follow it – it will be very interesting to see how the court handles the utility of the framework in moving forward in determining whether XRP is a security.”

The plaintiffs’ complaint reads using the framework’s extracts like “XRP purchasers made an investment of money in a common enterprise”; “XRP investors had a reasonable expectation of profits”; and “the success of XRP requires efforts of Ripple and others.”

“Lead Plaintiff and the Class invested fiat and other digital currencies, such as Bitcoin and Ethereum, to purchase XRP. As explained in the SEC Framework, investment of both fiat and digital currency meets the first prong of Howey,” the filing says.

Rettig noted that “each of the [factors in the SEC Framework] are based on underlying federal case law, so the litigants will likely rely upon these underlying cases and not simply the framework [itself].”

The plaintiffs’ filling contains the citation of the public statements made by Ripple executives such as CEO Brad Garlinghouse and CTO David Schwartz to bolster its argument. For example, in the interview with CNBC in 2017, Garlinghouse said:

“People are looking at the success Ripple has been having as a company, and I think that’s increased the value of XRP.”

“The Complaint emphasizes Ripple’s own statements to prove that XRP investors had a reasonable expectation of profits flowing from Ripple’s managerial efforts,” Chervinsky noted. “This is similar to how the SEC framed its own Complaint against Kik,” the messaging app company that the SEC alleges violated securities laws when it raised $100 million during a 2017 token sale.

Tweets as Evidence

Beyond interviews, the complaint cites tweets that the plaintiffs believe demonstrate that Ripple indicated XRP’s price would rise due to work the company was doing. Roughly 40 tweets are referenced in the filing, including tweets from the company, executives and other employees discussing exchange listings, Ripple’s XRP reserves and other marketing efforts.

I’ve never seen so many citations to Twitter in a complaint before,” Chervinsky said.

Beyond simply promoting XRP, the complaint hints that Ripple may have gone as far as to mislead the general public about which of its various products were being adopted.

“On April 26, 2017, Ripple tweeted a link to an article on its own site, proclaiming: ‘#Ripple welcomes 10 additional customers to our #blockchain #payments network.’ Neither this tweet nor the article it linked to informed readers that the blockchain payments network did not refer to the XRP Ledger, but rather Ripple’s xCurrent enterprise solution,” the complaint said, adding in the next paragraph:

“Just days later, on May 3, 2017, with the price of XRP continuing to rise, Ripple tweeted: ‘#Ripple adoption is sparking interest in XRP ‘which has had an impressive rally in the last two months’ via @Nasdaq.'”

Securities aside

The lawsuit also adds new claims that have not appeared in previous filings in the case, Chervinsky noted.

“For the first time, the plaintiffs now claim that Ripple violated California’s false advertising and unfair competition laws by making fraudulent statements about the genesis, circulating supply, and adoption of XRP,” he said.

For the lead plaintiff, those losses total $118,100, according to the complaint, but the full size of the losses allegedly incurred by the class has not yet been calculated.

More significantly, the plaintiffs want the court to declare that XRP is a security, which could have an impact on Ripple’s ability to continue selling XRP from its reserves, as well as potentially limit who can acquire the token.