Solana (SOL-USD) is not the first major network to come under legal fire for its crypto offerings. That particular honor belongs to the Ripple (XRP-USD) network. However, Solana is experiencing a new first given the circumstances for its own lawsuit. A group of SOL crypto investors is taking the network to court in a class action lawsuit. These plaintiffs allege illegal practices by developers.
The Solana network is a polarizing one. Depending on who you ask, it’s either a serious challenger to Ethereum (ETH-USD) for layer-1 dominance or a clunky project plagued by a dozen outages this year and many more before. Not helping this point of view is the blasé attitude exhibited by founder Anatoly Yakovenko at users’ frustrations.
It seems that a group of investors have become increasingly frustrated with the project, to the point of taking legal action against it. Yesterday evening, it was reported that a group of investors, led by Mark Young, are filing a class action lawsuit against Solana Labs. Yakovenko himself is a defendant in the suit, alongside the Solana Foundation. Several non-Solana entities named in the filing are crypto VC Multicoin Capital, its founder Kyle Samani and trading platform FalconX.
Solana Lawsuit Targets SOL Crypto as Security
The legal team representing Young lays out the case that Solana Labs and its employees have been illegally profiting from the SOL crypto. They argue that the coin is an unregistered security. To support this, the lawyers point to the Howey test, as established in the U.S. Supreme Court case Securities and Exchange Commission v. Howey. The test is a precedent for determining whether a transaction is a security investment.
To qualify as a security, an investment must come with an expectation of profits for the investor. It also must be a common enterprise where investors pool funds. And it must be derived from the efforts of others.
Lawyers representing Young argue that Solana is the common enterprise through which investors are pooling aspects. Developers’ promises to rival Ethereum and Bitcoin (BTC-USD), establishing the accepted framework for blockchain transactions, qualifies as reasonable expectation of profits.
In addition to the security versus currency debate, the suit claims several illegal coin offerings by the Solana team. If SOL is a security, this would make private offerings prior to the SOL initial coin offering (ICO) illegal. Multicoin’s involvement in the suit surrounds its large sales of the SOL crypto. Young’s team alleges Multicoin’s SOL dump came after long periods of “relentlessly” pumping the coin.
Solana Lawsuit Could Have Broad Implications for the Crypto Industry
In the grand scheme of the crypto industry and its relationship with regulators, this suit could have massive implications.
Ripple’s ongoing legal battle with the U.S. Securities and Exchange Commission (SEC) is also centering itself largely around the security versus currency debate. Whether or not the SEC can prove XRP is a security will influence regulatory power in the crypto market. But while that suit might set one precedent, a different outcome in the Solana suit could set an entirely different one.
It’s certainly an interesting inflection point for the market. The U.S. continues to push on with its own crypto regulations. As such, outcomes of these cases will have an imprint on the final crypto infrastructure. It will also massively influence the relationships with pre-ICO projects and venture capital firms. Many major projects will find themselves in hot water if Solana loses this suit, given the deep entanglement of crypto startups and VC investments.
On the date of publication, Brenden Rearick did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.