Ripple Labs, the company behind the XRP cryptocurrency, has a new legal battle on its hands following an amended filing which claims that XRP is a security under both Federal and California State laws.
While several other lawsuits alleging that XRP is ‘security’ has surfaced in the past, the current filing represents the first time that Ripple Labs will have to provide substantial evidence to refute the accusations.
Ripple Labs also has to deal with the fact the current filing presented by attorneys to Lead Plaintiff Bradley Sostack, mentioned sections of the recently released U.S Securities and Exchanges Commission (SEC) guidance on how they evaluate cryptocurrencies that qualify as ‘security.’
For instance, the filing quoted the SEC word for word by alleging that:
XRP buyers made an investment of money in a common enterprise.
XRP investors had a reasonable expectation of profits.
The success of XRP requires the efforts of Ripple and others.
The filing also mentioned a section of the SEC guidance which stated that “the investment of both fiat and digital currency meets the first prong of Howey” test while deciding whether a cryptocurrency fits into the ‘security’ description.
Regarding that aspect, the filing alleged that XRP would fit in since the lead plaintiff and others invested fiat and other digital currencies, such as Bitcoin and Ethereum, to purchase XRP sold by Ripple Labs.
The amended filing also relied on past comments and social media updates made by both Ripple Labs and its affiliated entities such as CEO Brad Garlinghouse to show the company’s belief that XRP’s price would increase due to its efforts.
Meanwhile, Ripple now has only 37 days to issue a response to the allegation given that the lawsuit was filed on August 5, and provides only a 45-day window for the defendant to accept or deny the claims.
What Could Happen If the Case Goes Against Ripple?
While it is apparent that a federal court victory will give Ripple Labs the needed approval to sell its tokens, a decision against the company could have far more implications for the startup.
For one thing, the lawsuit filed by the plaintiff (Bradley Sostack and other early XRP investors) demands that the court declares that XRP is security. If that happens, then the company will have to refund the investors for their supposed losses, a figure that is well above $118,100, the amount which Sostack (alone) claims he lost to his investment in XRP.
Declaring XRP “security” could also adversely affect the company’s ability to sell the tokens to retail investors, with the ‘accredited investor’ rule likely to apply.