February 22, 2022
Author: Kevin Stenner
Investing in blockchain, cryptocurrencies and NFT projects is a rollercoaster. From the highs of ‘pumping to the moon’ to the lows of a major dump during a bear market. These highs and lows are part of investing in this asset class and come with the territory. However, what has been all to prevalent in this asset class of late has been the ‘rug pull.’
What is a Rug Pull?
A rug pull is when the development team of a project hypes it to early investors, takes their money and then disappear without delivering the product. Often, the project being hyped is little more than a concept, but the development team uses slick marketing and social media hype to allure investors into the project. Then, once the project has reached a certain threshold number of investors, or the project’s token has reached a certain value, the development team will disappear with all of the investors’ money. This rug pull can be done all at once, as we saw recently with the SQUID token, where the token price plummeted from $2,861 USD to $0.0007 USD almost instantly. Or, alternatively, the rug pull can be done via a slow drip where the investors are strung along by a series of promises as the development teams bleeds the project.
A rug pull, regardless of if it is a sudden pull or a slow drip, is unequivocally wrong. However, is it illegal and can those responsible be held accountable?
Although this post is being written from the Canadian perspective, I think the concepts in the answers to these questions apply to many other jurisdictions.
What to Do if You Are a Victim of a Rug Pull
If you are unfortunate enough to be a victim of a rug pull, the first questions you need to ask are, do I know who the development team is? Do I know who is responsible for this?
In the world of crypto investing, this can sometimes be a difficult question as developers often hide behind pseudonyms or refuse to disclose their identity. The trouble here is, if you don’t know who pulled the rug, you cannot pursue them for doing so.
This is why, before investing in any crypto project, you want to know who the development team is and do your research on them. Not only does this let you know if the team has experience in the space (and will be able to deliver on their promises), but it lets you know who to pursue if there is a rug pull. An incorporated project helps, but only to the extent you know who the directors of the corporation are, as the corporation itself likely holds no assets.
If you are able to identify the development team responsible for the rug pull, you then need to determine if you can take legal action against the development team. This is of course very fact dependant, and you should discuss with legal counsel, but some general principles apply.
The defence of any team accused of orchestrating a rug pull is that they made a business decision to not pursue the project, that they were not obligated to keep funds in the project (remember these spaces are unregulated) or that it was general market conditions that caused the crash. Although these defences may all be true to some extent, the real questions to ask are:
- Was it always the intent of the development team to orchestrate the rug-pull?
- Did the development team ever plan on actually delivering the product?
- Was the plan always to pump the price and then run away with the money?
- Did the development team knowingly misrepresent to investors the goals/intent of the project?
Although it could be expressly clear that the development team never intended to actually pursue the project, it is likely more subtle and, through the litigation process, you will need to prove that the development team never actually intended to pursue the project and instead conspired to defraud investors or purposefully misrepresented the goals of the project. To do this, you and your legal team will need to secure the records of the development team and fully investigate what efforts they actually undertook to advance the project.
Cryptocurrency Legal Action
First, although not investing advice, before investing into a crypto project you should conduct your due diligence on the development team. At minimum, if you know who the team is, you know who to pursue in the event of a rug pull.
Second, if you are caught in a rug pull and know who the culprits are, you can potentially hold them accountable if you can prove that they: i) misrepresented the aims of the project; and/or ii) never intended to deliver on their promises.
Hopefully you are never caught in a rug pull, but if you are, I hope this provides some direction as to how to proceed.