Investors Are Taking the Folks Behind Solana to Court. Here's Why

One investor blames Solana leadership for significant losses. 

Solana (SOL) was one of last year's crypto super stars, rising over 11,000% in 2021, according to CoinGecko. However, it has since struggled -- along with most other cryptocurrencies -- and is now trading over 85% down on its all-time high. Many crypto investors face significantly devalued portfolios, and some feel they have been misled. 

Indeed, one California investor has filed a lawsuit on behalf of other Solana investors against Solana Labs, the Solana Foundation, Solana Labs CEO Anatoly Yakovenko, and others. As we'll see in this article, the result of the lawsuit could have ramifications for the whole cryptocurrency market.

What's behind the Solana lawsuit

Mark Young, who filed the lawsuit, claims that Solana was sold as an unregistered security and questions whether the promotion of Solana was "false and misleading," according to legal documents filed. Young bought Solana in August and September last year.

Most cryptocurrencies are not registered as securities, which means they don't have to follow the same strict rules as equities on how they are traded or report information. Right now, many are classed as commodities and come under the remit of the Commodity Futures Trading Commission rather than the Securities and Exchange Commission (SEC). 

However, the SEC already argues that many cryptocurrencies are in fact securities. It is pursuing its own lawsuit against Ripple (XRP) for exactly this reason. SEC Chair Gary Gensler has said a number of cryptocurrencies fit the definition of an investment contract. This is where people invest in a common enterprise and hope to profit from the efforts of a promoter or a third party. Young's lawsuit is based on this same argument.

Bitcoin (BTC) isn't run as a common enterprise with a promoter or third party, as it's designed to be decentralized. But many other cryptos are more centralized -- which is where things get tricky. Young's lawsuit argues that Solana is centralized because a large proportion of SOL coins are controlled by the Solana Foundation and Solana Labs. It also suggests that Solana's technical outages are an indication of Solana's centralized nature.

Ultimately, Young believes that many investors have lost money "as a direct result of Defendants’ misconduct," according to the complaint. The document goes on to state that "Plaintiff and the other Class Members -- many of whom are retail investors who lack the technical and financial sophistication necessary to have evaluated the risks associated with their investments in SOL securities -- have suffered significant damages, in an amount to be proven at trial."

What it means for investors

The initial action didn't have an immediate impact on Solana's price. But a lot depends on how the lawsuit proceeds. Ripple remains a top-10 crypto by market capitalization, but the SEC case has been a thorn in its side. Not least because it isn't available from several top U.S. crypto exchanges. If exchanges started to de-list Solana, it could be problematic for the project.

There's also a bigger picture to consider. If a court rules that Solana is an unregistered security, a number of other crypto projects could face similar accusations. Many top cryptocurrency projects and those who lead them could face lawsuits from disgruntled investors.

Crypto exchanges could also be accused of trading in securities without having had the right licenses. Brokerages that trade securities have to register and follow various rules. Many current crypto exchanges are not registered security brokers. Given that a number of exchanges are already struggling, legal action or fines could add to their woes.

Whether it's retail investors, the SEC, or lawmakers in Washington, questions about crypto abound. People want to know how to categorize crypto and what levels of investor protection should be (or have been) in place. Some investors may want to hold people accountable for their losses. In the absence of detailed crypto regulation, we may find it is judges and juries who have to make some of those decisions.