Mark Young, a California resident, has filed a class action lawsuit against Solana Labs, Solana Foundation, CEO Anatoly Yakovenko, Investment firm Multicoin Capital, Crypto trading platform FalconX and others.
Law firm Roche Freedman and Schneider Wallace Cottrell Konecky are handling this high profile suit.
Young has alleged that Solana is indeed a security (share) or rather an unregistered one, since it is satisfying the US Howey Test. Howey Test is a US Supreme Court test case wherein certain factors are checked against a contract, and if the contract satisfies the test then the contract is considered an investment security and is subject to all disclosure and registration requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934.
As of 11.58 am, Solana was up by 1.04 per cent at $38.31, according to Coinmarketcap data.
So what exactly is the case with Solana?
What Is Being Alleged?
Young started investing in Solana Tokens (SOL) on March 24, 2020. He has alleged that Solana has made enormous profits by selling their crypto tokens to SOL retail investors, when in fact these tokens were a security and mandatory regulatory disclosures should have been made on them, but which were not made.
March-April 2020 Initial Auction: Solana Labs conducted their first token sale in ‘Dutch Auction’ style in March 2020. Dutch Auction is a method, wherein the selling price of an asset is reduced until a suitable buyer is found. This entire sale is tantamount to a practice called ‘Initial Coin Offering (ICO)’.
What is being alleged is that Solana labs used these funds raised from the ICO to spend on marketing materials and other promotional SOL security propaganda activities, as a result of which they created huge fortunes and made their token from obscure to becoming one of the top in relatively less time.
Supply: It is also being alleged that Solana has made misleading statements regarding its SOL token’s supply and even falsely claimed to have burned the tokens. On April 28, 2020, Solana’s CEO admitted that they have not made a token oversupply pertaining to a market maker disclosure as well as other information on time.
“[Solana] did not disclose this information to the public, as well as the size and nature of the loan, during the CoinList auction, and subsequent Binance listing. Yakovenko further stated that we plan to reduce the circulating supply by removing the 11,365,067 supply from the market within the next 30 days. After removing the supply, we aim to burn the tokens. This did not happen. Instead, Solana only recalled about 3.3 million tokens and the rest hit the market,” read a para from the suit court filing document.
Decentralisation: It is a general practice among crypto Blockchain companies to distribute their tokens among a large number of users so that the overall control of the Blockchain does not stay concentrated with a single entity.
“Contrary to Defendants’ public representations, however, SOL is not decentralised, because company insiders hold a substantial percentage of them. As of May 2021, insiders held 48 per cent of the SOL supply. The network is thus highly centralised,” read the court document.
Network Issues: It is being alleged that the Solana Blockchain is prone to many network outages. The latest serious outrage which occurred in September, 2021 impacted Solana’s price, taking it down 12 per cent, while its Blockchain activities paused for about 18 hours.
Apart from this, it is also being alleged that the Solana Blockchain is prone to severe network congestion, and it has further degraded its network’s reliability. The most recent network congestion issue which occurred in January 2022 caused several DeFi (Decentralised Finance) user’s positions to be liquidated or sold forcibly due to margin calls.
Dumping: It is being alleged that Multicoin Capital Management LLC and Kyle Samani actively and quite relentlessly promoted SOL crypto tokens after having acquired them for $0.4 in 2019 when they participated in Solana’s Series A round.
“Samani and Multicoin continuously flogged SOL securities, inflating its market price from below a dollar to hundreds of dollars, persisting in their promotional efforts even after it was clear that Solana had serious outages and technical issues,” read the court document.
Apart from this, the Multicoin group had sold some millions of dollars worth SOL tokens to retail investors, and took home quite a handsome profit. Young has alleged that there are more like him who fell prey to this and bought SOL tokens.
“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. To offload the SOL securities, they have used OTC trading desks such as FalconX to act as a broker for the sale of substantial sums of SOL securities,” read the court documents.