The SEC on Tuesday charged Ripple and two executives for raising over $1.38 billion via an unregistered securities offering.

The SEC filed the complaint in the federal district court in Manhattan alleging that the defendants violated the registration provisions of the Securities Act. It prayed for injunctive relief, disgorgement with prejudgment interest, and civil penalties. The two executives named in the complaint are Christian Larsen, Ripple’s co-founder, executive chairman of its board, and former CEO; and Bradley Garlinghouse, the company’s current CEO. (CROWDFUNDINSIDER)

SEC: Investors short-changed on adequate information due to non-registration

Stephanie Avakian, Director of the SEC’s Enforcement Division, stated: “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 deems XRP a security because the defendants offered, sold, and promoted XRP as an investment.

The SEC claims an international law firm advised the defendants that XRP could be construed to be a “security,” and would likely not qualify classification as a “currency.”

It also alleges that Ripple did not contact the SEC to obtain clarity about the legal status of XRP before engaging in large-scale distribution, though the law firm suggested it do so.

Further, the SEC claimed that in an email to a former associate of Ripple, Larsen said the XRP he received upon Ripple’s founding was “comp[ensation] for . . .personally assuming th[e] risk” of being deemed the issuers of securities—namely, XRP.

The SEC went on to claim that the defendants proceeded to sell billions of XRP and that such sales implicitly hinted at a rise in their value in order to attract buyers.

Garlinghouse responds

In a blog post on Tuesday Garlinghouse quoted a response from his lawyers on the SEC’s charges:

“The SEC is completely wrong on the facts and law and we are confident we will ultimately prevail before a neutral fact-finder. XRP, the third-largest virtual currency with billions of dollars in trading every day, is a currency like the SEC has deemed Bitcoin and Ether and is not an investment contract. This case bears no resemblance to the initial coin offering cases the SEC has previously brought and stretches the Howey standard beyond recognition.” [Andrew Ceresney, Debevoise & Plimpton]

Garlinghouse also said: “Ripple, Chris, and I may be the ones named in the filing, but this is an assault on crypto at large. In this case, XRP is a proxy for every other ‘alt-coin’ in the space. From there, you have a snowball effect; this isn’t good news for any market maker, exchanges like Coinbase, etc. This sets a terrible industry-wide precedent for any company working with a digital asset.”

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