SEC Sues Ripple Labs For Unregistered Digital Securities Offerings

On Tuesday the Securities Exchange Commission (SEC) filed a complaint in the Southern District of New York against blockchain company Ripple Labs, Inc., its CEO Bradley Garlinghouse, and its co-founder, chairman of the board, and former CEO Christian A. Larsen for purportedly raising more than $1.3 billion through its unregistered digital securities offerings.

According to the complaint, since at least 2013 the defendants have “sold over 14.6 billion units of digital asset security called ‘XRP,’ in return for cash or other consideration worth over $1.38 billion U.S. Dollars, to fund Ripple’s operations and enrich Larsen and Garlinghouse.” The SEC averred that the defendants engaged in this conduct without registering their offering and sales of XRP with the SEC as required by law. 

Garlinghouse stated that the SEC’s complaint is “an attack on the entire crypto industry and American innovation.”

Meanwhile, Stephanie Avakian, Director of the SEC’s Enforcement Division, said “Issuers seeking the benefits of a public offering, including access to retail investors, broad distribution and a secondary trading market, must comply with the federal securities laws that require registration of offerings unless an exemption from registration applies. We allege that Ripple, Larsen, and Garlinghouse failed to register their ongoing offer and sale of billions of XRP to retail investors, which deprived potential purchasers of adequate disclosures about XRP and Ripple’s business and other important long-standing protections that are fundamental to our robust public market system.”

The SEC claimed that Ripple used money from the offering to fund its operations, but failed to disclose how it was spending the funds, “or the full extent of its payments to others to assist in its efforts to develop a ‘use’ for XRP and maintain XRP secondary trading markets.” Furthermore, the individual defendants personally gained $600 million from these unregistered sales. According to the SEC, the individual defendants still hold a large amount of XRP, however, since there is no registration statement, so they can “continue to monetize their XRP while using the information asymmetry they created in the market for their own gain, creating substantial risk to investors.”

Moreover, the SEC claimed that since Ripple failed to file a registration statement, it has not provided investors with material information that other issuers provide in said statements with public offerings. As a result, the SEC explained that Ripple investors did not have access to the same type of information for which investors for other companies had access and that Ripple also failed to file its subsequent periodic filings as required. 

Additionally, the SEC asserted that Ripple disregarded previous legal advice as early as 2012 “that under certain circumstances XRP could be considered an ‘investment contract’ and therefore a security under the federal securities laws” and thus, the defendants “assume(d) the risk of initiating a large-scale distribution of XRP without registration.”

The defendants are accused of violating Sections 5(a) and 5(c) of the Securities Act of 1933 and the individual defendants are accused of aiding and abetting violations of Sections 5(a) and 5(c) of the Securities Act. The SEC has sought to permanently enjoin the defendants from further violations, a disgorgement of all ill-gotten gains, prejudgment interest, to prohibit the defendants from participating in any offering of digital asset securities, and civil civil penalties. 

The SEC lawsuit comes after a suit against Ripple Labs survived the company’s motion to dismiss earlier this year in relation to the company’s sale of XRP. Months later, the court partially granted Ripple Labs’ second motion to dismiss. In addition, Ripple Labs sued YouTube in April for hosting and failing to take down accounts allegedly perpetrating an XRP giveaway scam.