Is the Solana (SOL) token a security and was it issued in violation of US securities laws? This is exactly what the class action lawsuit filed July 1st, 2022 claims, to include violations of California securities laws. All Solana principals were named defendants. Including personal claims against the Founder Anatoly Yakovenko, hedge fund manager Kyle Samani which marketed and received SOL for issuance, and FalconX LLC, an OTC trading desk which sold SOL through secondary exchanges.
How strong are the claims?
Having reviewed the complaint, the claims are substantial and convincing. It is difficult to imagine a jury – which is unlikely to comprehend much regarding blockchains, crypto-assets, Reg D, securities laws, and other technical matters such as control/management/repair of the Solana ecosystem – to denying these claims and finding for the defendant. The plaintiff lists numerous purchases of SOL at inflated prices which have since collapsed, totaling 10s of thousands of dollars. The class is open and is looking for class member to join the lawsuit.
What are the causes of action being made?
Basically, that the defendants sold unregistered securities, and SOL is a security because it passes all elements of the Howey test which is generally applicable to determining an investment contract. This test is discussed at length in other posts on this blog, but generally the complaint makes a strong case that SOL is a passive investment into a centralized project where the market value/price of the token is to a large extent controlled by the issuer as they still presently control around 60% of all tokens and engage in marketing and voting control as well through its voting protocol.
The complaint makes the case that purchasers/investors in SOL are buying principally for the purposes of price appreciation, and not for the purpose of using SOL to purchase goods or services, and have no significant voting or governance control over the SOL platform. Solana companies initially sold SOL through Reg D offerings to accredited investors but when the platform went live, they decided that it was sufficiently decentralized that it was akin to BTC or ETH and would not be deemed a security. Apparently, all secondary exchanges agreed.
However, the issuer entities and other insiders still retained control of a substantial portion of SOL, continued to issue it to insiders, strategic partners, and staff/employees, and continued to manage and operate the platform after its launch as demonstrated by numerous outages which were required to be fixed by the issuer/manager. These efforts certainly appear to be essential and/or significant, necessary to the survival/continuity of the platform and there was likely substantial reliance on the issuer by SOL investors to develop and manage the platform in order to obtain profits.
Furthermore, the SOL issuer and its partners sold billions in SOL to retail investors during the prior run-up in price, while marketing it to retail investors through various channels.
What could be the ramifications to the crypto industry?
DIRE. If a jury proceeds to decide that SOL is, and has always been a security, that means the vast majority of all coins/tokens being sold in the markets are also securities, and furthermore these coins/tokens have been selling freely and openly on secondary exchanges which are likewise acting in violation of federal and state laws allowing the trading of unregistered securities to retail investors without obtaining a broker/dealer license as required by the Securities Exchange Act of 1934. Market repercussions could be tragic as most tokens stop trading in the US until exchanges become registered broker/dealers and their values will likely plummet due to the lack of liquidity.
The fact that numerous exchanges failed to vet so many tokens/coins and allowed the trading of unregistered securities could also spell legal liability from retail traders and regulators as dozens of class action lawsuits would be launched. The lack of a trading market and legal action against the largest exchanges could truly spell doom and total catastrophe for the crypto industry.
There will likely be a lucrative settlement for the plaintiff class and possibly other class members as the Solana company, foundation and other defendants are unlikely to retain attorneys who would be dumb enough to allow this case to go through a trial and allow the jury to render a verdict, as fortune is NOT in their favor, and the collapse of the entire crypto industry hangs in the balance. Furthermore, all or most parties are very likely insured and the insurer(s) will likely push for settlement up to policy limits with the remainder made up by the defendants out of pocket.