Ripple is feeling its third “ripple” of lawsuits for alleged securities fraud. The latest suit by private XRP investor alleges that Ripple Labs, Inc and its CEO Bradley Garlinghouse have fused their token with its proprietary Ripple technology. They may have also profited from price increases the whole time.
In just the last quarter of 2017, Ripple Labs Inc. has been funding themselves by selling close to $100 million worth of their own cryptocurrency. According to the lawsuit, XRP’s centralized and mining-free distribution model allowed for a continuous ICO period, which Ripple may have taken advantage of for consistent self-funding.
What is interesting about this lawsuit is how it will set a precedent throughout the industry worldwide.
Here is a description of how the “Howey test” works, according to The Next Web:
In 1946, the U.S. Supreme Court established the “Howey test”, a framework to determine as to whether an asset is a security (or investment contract).
The Howey test goes as follows: a transaction is a security if it is an investment of assets, there is an expectation of profits from that investment, that investment is in a common enterprise (a la, pooling collectively for an ICO), and any profits generated from those efforts are a result of a promoter or third party.
If XRP wins, Ripple Labs and its CEO would be liable for illegally trading millions of dollars worth of securities. As the company’s leadership face criminal charges, investors who purchased XRP tokens may be able to get full refunds.
Ripple Labs have hired Mary Jo White, former Securities and Exchange Commission (SEC) chair and Andrew Ceresney, her enforcer, to help them fight this case.