SEC formally charges Ripple Labs for conducting $1.3 billion in XRP sales
The SEC alleges that the XRP sales amounted to unregistered security offerings. They are seeking injunctive relief, disgorgement, and civil penalties.
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The SEC said they are also charging CEO Brad Garlinghouse and Chairman Chris Larsen for selling approximately $600 million worth of XRP.
Lawyers for Ripple have denied any wrongdoing and plan to fight the charges in court. They argue that XRP is not a security and therefore is exempt from the Securities Act of 1933.
Ripple General Counsel Stuart Alderoty responded to the SEC’s Wells Notice saying, “The SEC’s theory, that XRP is an investment contract, is wrong on the facts, the law and the equities.”
Other US government organizations such as FinCEN and the DOJ have already declared that XRP is not a security. Garlinghouse implied this is a hail mary lawsuit by Chairman Jay Clayton, mere days before he leaves office.
Other cryptocurrency developers who were sued by the SEC settled out of court with a slap on the wrist. For example, EOS conducted a $4 billion unregistered security offering and only paid a $24 million fine to the SEC.
“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,” said Stephanie Avakian, Director of the SEC’s Enforcement Division.
“Here, we allege that Ripple and its executives failed over a period of years to satisfy these core investor protection provisions, and as a result investors lacked information to which they were entitled.” said Marc P. Berger, Deputy Director of the SEC’s Enforcement Division.
Ripple’s lawyers argue that they were exempt from these rules because they only sold XRP to “foreign market makers… on cryptocurrency exchanges,” or “via OTC transactions to mainly institutional, third party entities.”
They also argue that XRP fails the “Howey Test,” which is a test the SEC uses to determine whether or not an asset is a security: “XRP is not an investment contract because there is no ‘contract’ underlying any ‘investment contract.’”
“We are not aware of a single case in the more than 70 years since Howey that has found an investment contract absent a contract or privity between the buyer and seller. Here, the vast majority of XRP trading has taken place on the secondary market, wholly independent of Ripple, with no contract or privity with Ripple.” Ripple’s lawyers said in a response to an SEC Wells Notice.
The SEC is not alleging there was any fraudulent conduct by Ripple, and no criminal charges have been brought against Ripple or its executives. Securities violations are civil court matters. This will not affect the ability of the XRP network to operate, and Ripple Labs does not have the ability to shut down the XRP network unilaterally.
Best case scenario, a judge will throw this case out because XRP is not a security. Worst case scenario Ripple Labs receives an injunction barring the company from selling XRP to US investors, and has to pay a fine and disgorgement of any profits earned from XRP sales to US investors.
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