Jul 22, 2022 3 min read Bitcoins

Truth-testing tweets

Let us start out with the usual set of disclaimers. I do not own, nor have I ever owned any of the coins involved in this case. I cannot verify the details of the complaint found in the class action lawsuit against Solana Labs. That said, it's quite an interesting read.

The case Mark Young v. Solana Labs, Inc., et al., Case No. 22-cv-03912 is a class action suit with hundreds of thousands of potential members of the class. The class includes all investors in Solana from March 2020, when Solana was first offered to US investors, to the present.

The case was, in a sense, a virtual inevitability as the courts try to do their job providing relief for alleged offenses after the most recent meltdown in the cryptocurrency market. This meltdown, aka “crypto winter,” is not to be taken lightly. This winter has vaporized two trillion dollars in market value. It has been a major force leading to at least two hundred lawsuits and the list keeps growing. The suit against a Coinbase employee, for example, enlarges the range of these suits by extending the allegations into insider trading. Still, even with so many choices among lawsuits to examine, the recent Solana case is worth a read for the clarity of the legal issues and the alleged fact pattern in the hyper world of San Francisco crypto.

The legal issues

Since the case revolves around the issue of whether Solana is an unregistered security, the plaintiffs need to establish that Solana was legally a security. This is what the SEC itself has been trying to do in a particularly ugly dispute with Ripple Labs. Meanwhile, Congress is debating the issue while the cryptocurrency cases accumulate in the courts. The facts in this Solana case may or may not support its coin SOL being a security, without regard to the outcome of Ripple Labs. Conflicts among the courts would not be a surprise.

The complaint here relies in large part on the 2019, SEC Framework for “Investment Contract” Analysis of Digital Assets. The Framework appeals to the law as it has developed, based on the U.S. Supreme Court’s Howey case, SEC v. Howey Co., 328 U.S. 293 (1946). The plaintiffs must meet the “Howey test.” Securities laws can apply to any agreement whether it looks like the usual stock or bond. The agreement is a “security” if investors: invested money, participated in a common enterprise, and have a reasonable expectation of profit. The law is a morass of complexity in the securities area. It will be interesting to see how the court reads the complaint and what they conclude in this case.

Tweets galore

As part of the complaint, the facts include a long list of tweets, and they are likely to be the most interesting part of the case for the non-lawyers. The tone of these tweets was often strident. Here is one cited in the Complaint from September 15, 2021: “Anyone who bought SOL in 2020 and held can afford to rent a Ferrari today.”

For SOL investors, many of the most fascinating allegations involved what the defendants were doing while they were writing their widely read tweets. This is especially interesting because Solana Labs and Solana Foundation are said to have owned 61% of SOL securities as late as May 2021.[1] The Complaint alleges the few controlled the many.[2] It also cites a list of tweets promoting the value of SOL. The court will be looking at the timing and tone of the many tweets with the alleged internal behavior of the firms. This would be especially relevant for Hold On For Dear Lifers (HODLs).

Of course, the complaint only provides part of the story, but even that part should lead HODLs to rethink their data sources and confidence level. Tweets by anyone are not made under oath. Reading them is highly entertaining but what is not said can be the important part of the message. It remains to be seen what other evidence will be admitted at trial and how this will influence the court’s decision.