Solana Bubbles

SOL investors sue Solana Labs and VC firm Multicoin over securities laws violation

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After its token shot up last year and then lost 85% of its value in the current bear market, Solana is being sued in California in connection with its alleged securities laws violations. A class action lawsuit filed in California accuses Solana Labs, its founder, and a prominent venture capital firm of profiting from the sale of an unregistered security.

The lawsuit was filed by Mark Young, an investor who purchased the SOL token in August and September 2021, on behalf of himself and all others similarly situated. He named as defendants Solana Labs, the Solana Foundation, the project’s founder Anatoly Yakovenko, venture capital firm Multicoin Capital and its founder Kyle Samani, and FalconX, an institutional digital asset trading platform.

The case was filed in the Northern District of California by Roche Freedman LLP and Schneider Wallace Cottrell Konecky, with the former having recently filed a lawsuit against Binance.US for its role in promoting the LUNA and UST tokens, which crashed spectacularly.

Young accuses the defendants of making enormous profits through the sale of SOL to retail investors in the U.S., “in violation of the registration provisions of federal and state securities laws, and the investors have suffered enormous losses.”

Solana Labs first sold its SOL tokens in March 2020, and shortly after, they began to trade on several exchanges. It went on to reach $258 at its peak in November at a $77 billion market cap. According to the lawsuit, this was largely because of the promotional efforts of the defendants, efforts they made with the money they fleeced from the average investors.

Young also aimed at the undefined token economics of Solana. In 2020, for instance, the Solana Foundation agreed to lend a market maker 11.3 million SOL tokens without disclosing them to the public. The founder would later come out to say that the company would remove them from the supply and burn them. Blockchain records show that he didn’t keep the promise, with only about a third of these tokens recalled.

Solana’s centralization was also targeted by the lawsuit, with Young claiming that Solana insiders hold about 48% of the total supply, making it highly centralized.

Then there are the outages. As CoinGeek has reported previously, the network has proven its inconsistency through several outages, some of them lasting several hours. This year alone, it has recorded 12 outages, the most recent being a month ago.

While all these factors make Solana a bad investment, the lawsuit is based on securities violations, and Young believes that SOL qualifies as a security under the Howey test.

“Purchasers who bought SOL securities have invested money or given valuable services to a common enterprise, Solana. These purchasers have a reasonable expectation of profit based upon the efforts of the promoters, Solana Labs and the Solana Foundation, to build a blockchain network that will rival Bitcoin and Ethereum and become the accepted framework for transactions on the blockchain,” the lawsuit says.

The venture capital darling that some called ‘the next Bitcoin’

Multicoin Capital and its founder Samani were included as defendants for relentlessly promoting SOL after purchasing it for $0.4 in 2019 when the VC firm led Solana’s Series A offering. 

“The Multicoin Defendants offloaded millions of dollars of SOL securities on retail investors such as Plaintiff and profited handsomely from their promotion of unregistered SOL securities,” the lawsuit alleges.

FalconX, the other defendant in the lawsuit, is accused of facilitating Multicoin’s dumping of SOL tokens by acting as its broker.

And while it’s Multicoin that has been named as a defendant, several other investors have raked in billions from Solana and have been promoting it just as relentlessly as Samani, if not more. 

One of its foremost backers is Sam Bankman-Fried, the founder of FTX exchange and quant firm Alameda Research. SBF has gone as far as saying that Solana will become the next Bitcoin. In January this year, when Solana was recording regular outages, he came out to defend it, saying that despite the outages, it was still outperforming all other blockchains.

Others that invested in Solana in its earlier stages include BlockTower Capital, Passport Capital, Slow Ventures, Andreessen Horowitz, and OKEx exchange.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups from BitMEX to BinanceBitcoin.comBlockstreamShapeShiftCoinbaseRipple,
EthereumFTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.

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