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The U.S. Securities and Exchange Commission today filed a lawsuit against Ripple Labs Inc. and two of its executives claiming that the company, which offers the XRP cryptocurrency, illegally sold unregistered securities.
The complaint alleges that Ripple, along with Christian Larson, the company’s co-founder and executive chairman of its board and former chief executive officer, and Bradley Garlinghouse, the company’s current CEO, raised capital to finance the company’s business beginning in 2013 through the sale of unregistered securities called XRP to investors in the U.S. and worldwide.
The SEC says Ripple distributed billions of XRP in exchange for noncash considerations such as labor and market-making services, which is the key to the complaint. The offering of cryptocurrency is not in itself illegal when the purpose is to provide a digital currency for trading, but the line is crossed when funds from a cryptocurrency are used primarily for company purposes. In that case, the cryptocurrency must be registered as a security.
Larson and Garlinghouse are both alleged to have effected personal unregistered sales of XRP totaling $600 million, and failed to register their offers and sales of XRP or satisfying any exemption from registration in violation of securities law.
“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,” Stephanie Avakian, director of the SEC’s Enforcement Division, said in a statement. “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.”
Nearly a year in the making, the SEC filing does not come as a complete surprise. Ripple was sued in a class-action lawsuit by investors who lost money investing in XRP in February. The class-action suit, which is still working its way through court, alleged as the SEC now does that Ripple’s offering of XRP breached the Securities Act.
It was noted at the time the class-action lawsuit was filed that the SEC had not take action against Ripple, but that could change. Garlinghouse is on record saying that “we have been talking to the SEC for some period of time.”
This also isn’t the first action taken against a company alleged to have breached securities law in offering a cryptocurrency. Some of the prominent SEC cases include those against Telegram Group Inc. and Kik Interactive Inc. The Telegram case was eventually settled in October when the company agreed to pay a $18.5 million penalty as well as return some of the monies raised through its token offering. The Kik case was also settled in October with Kik agreeing to a $5 million fine.
Any settlement between Ripple and the SEC is likely to be significantly. XRP has a market capitalization of more than $20 billion based on its current price and has been traded and offered for a lot longer.
Ripple itself looks set to fight the lawsuit. Ahead of the lawsuit being officially filed, Garlinghouse claimed that the lawsuit was “fundamentally wrong as a matter of law and fact” and questioned its timing.
“XRP is a currency and does not have to be registered as an investment contract,” Garlinghouse said. “In fact, the Justice Department and the Treasury’s FinCEN already determined that XRP is a virtual currency in 2015 and other G20 regulators have done the same. No other country has classified XRP as a security.”
“The SEC has permitted XRP to function as a currency for over eight years, and we question the motivation for bringing this action just days before the change in administration,” Garlinghouse added. “Instead of providing a clear regulatory framework for crypto in the U.S., [SEC Chairman] Jay Clayton inexplicably decided to sue Ripple — leaving the actual legal work to the next administration.”
News of the lawsuit raised concern among investors. The price of XRP dropped nearly 15% to $0.432114 as of 8 p.m. EST.
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