Investor Sues Ripple Alleging 'XRP Is a Security'

An investor who claims they lost money buying and selling the cryptocurrency XRP has filed a class action lawsuit against distributed ledger startup Ripple, alleging that the company violated state and federal securities laws.

Ryan Coffey, represented by San Diego attorney James Taylor-Copeland, filed the suit in the San Francisco County Superior Court on Thursday. Coffey is seeking damages "on behalf of all investors who purchased Ripple tokens ("XRP") issued and sold by Defendants," naming Ripple, XRP II (the company's registered and licensed MSB), CEO Brad Garlinghouse, and 10 unnamed parties.

Ripple Labs and Garlinghouse have come under increased scrutiny in recent weeks over the degree of association they have with XRP, a cryptocurrency that surged to a market capitalization of over $140 billion in January, but has since fallen below $35 billion. Ryan Zagone, Ripple's director of regulatory relations, told a UK parliamentary committee Tuesday that "there's not a direct connection between Ripple the company and XRP."

For some observers, though, the relationship between the company and the cryptocurrency is clear. Thursday's complaint argues:

"The development of the XRP Ledger, and the profits that investors expected to derive therefrom, were, and are, based entirely on the technical, managerial, and entrepreneurial efforts of Defendants and other third parties employed by Defendants."

U.S. federal law requires companies selling securities to register with the Securities and Exchange Commission (SEC). Whether a financial instrument qualifies as a security depends on the Howey test, a standard derived from a 1946 Supreme Court case.

If an instrument involves an investment of money and carries a reasonable expectation of profits – an expectation that depends on the actions of a specifically identifiable group of people – then it is a security. Coffey's complaint argues that XRP checks off all of those boxes.

Indeed, the lawsuit is one that could remain a case to watch given that the question of whether XRP is indeed a security is still hotly debated, as profiled by CoinDesk.

When reached for comment, Tom Channick, Ripple's head of corporate communications, told CoinDesk via email:

"We've seen the lawyer's tweet about a recently filed lawsuit but have not been served. Like any civil proceeding, we'll assess the merit or lack of merit to the allegations at the appropriate time. Whether or not XRP is a security is for the SEC to decide. We continue to believe XRP should not be classified as a security."

Taylor-Copeland was not available to comment on the complaint before press time.

Read the full complaint below:

Coffey v. Ripple Labs Complaint by CoinDesk on Scribd