(Bloomberg) -- Ripple Labs Inc., the fintech startup that controls the world's third-largest cryptocurrency, was hit by a lawsuit alleging that it led a scheme to raise hundreds of millions of dollars through unregistered sales of its XRP tokens.
The San Francisco-based company created billions of coins “out of thin air” and then profited by selling them to the public in “what is essentially a never-ending initial coin offering,” the class-action complaint filed Thursday in the Superior Court of California said. Ripple violated state and federal laws by offering unregistered securities to retail investors, the filing said.
The plaintiff, investor Ryan Coffey, is seeking unspecified damages and a declaration that Ripple Labs and Chief Executive Officer Bradley Garlinghouse sold unregistered securities. Coffey is seeking to proceed on behalf of all purchasers of Ripple tokens.
“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,” Ripple spokesman Tom Channick said in an emailed statement. “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.”
The U.S. Securities and Exchange Commission said in July that companies which raise money through the sale of digital assets must adhere to federal securities laws. The SEC has also subpoenaed firms and individuals behind coin offerings it believes might be breaking the law, a person with direct knowledge of the matter said earlier this year. An SEC spokesman declined to comment on the agency's view of XRP at the time.
“XRP is a security,” the plaintiff said. “Defendants themselves have recognized that XRP investors have a reasonable expectation of profit, and publicly touted XRP's price performance on numerous occasions.”
Coffey purchased 650 XRP tokens for about $2.60 each, or $1,690, at the start of January and sold them a few weeks later at a loss of approximately $551, or about 32 percent of his initial investment, according to the filing.
Whether Ripple and bigger rival Ether are securities has been at the center of debate within the sector since the SEC comments. Gary Gensler, the former chairman of the U.S. Commodity Futures Trading Commission, said last month that both XRP and Ether -- the second most valuable digital coin -- could be classified as securities.
The lawsuit also highlighted Ripple's attempt to persuade some of the top U.S. crypto exchanges to list XRP. Bloomberg reported in April that the startup suggested paying financial incentives to the venues, Gemini and Coinbase, citing four people with direct knowledge of the matter, who asked not to be identified discussing private information.
The case is Coffey v. Ripple Labs Inc., Superior Court of the State of California (San Francisco).
To contact the reporter on this story: Lily Katz in New York at lkatz31@bloomberg.net.
To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Jeremy Herron at jherron8@bloomberg.net, Dave Liedtka, Andrew Dunn
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