The US Securities and Exchange Commission has unveiled a $1.3bln lawsuit against Ripple and two of its executives for allegedly conducting an unregistered securities offering.
According the the release from the SEC, Ripple, Garlinghouse and co-founder and executive chairman of the board Christian Larsen conducted an ‘ongoing’ unregistered securities offering. The SEC alleges that Ripple raised funds from 2013 onwards through the sale of the company’s native token XRP to investors in the US and abroad.
The filing also alleges that Ripple distributed billions of XRP in exchange for ‘non-cash consideration’ including labor and market-making services. The complaint also targets Larsen and Garlinghouse directly, claiming that they carried out personal unregistered sales of XRP to the value of $600mln.
The SEC alleges that the defendants failed to register their offers and sales of XRP or provide any detail to allow for exemption from registration which was a violation of registration provisions of federal securities laws.
Failure to register a securities offering
The SEC filing is focused on the failure of the company, Garlinghouse and Larsen to register a securities offering which did not afford investors the necessary documents and information about Ripple and XRP.
“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,” said Stephanie Avakian, Director of the SEC’s Enforcement Division.
“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 filed its complaint in the federal district court in Manhattan and the charges include violation of registration provisions of the Securities Act of 1933. The SEC is looking for injunctive relief, disgorgement with prejudgment interest, and civil penalties.
Ripple will fight
As reported by The Daily Chain earlier this week, Garlinghouse had already indicated that Ripple would be fighting the SEC’s filing and allegations in court. The CEO also shared a note he’d sent to employees regarding the ongoing situation.
The CEO added that he and Larsen had been given the option to settle with the SEC seperately but have chosen not do so due to the belief that they can successfully prove that XRP is not a security.
Garlinghouse highlighted three points that the company believes are pivotal in their defence against the SEC’s allegations:
- XRP is not an “investment contract.” XRP holders do not share in the profits of Ripple or receive dividends, nor do they have voting rights or other corporate rights. Purchasers receive nothing from their purchase of XRP except the asset. In fact the vast majority of XRP holders have no connection or relationship with Ripple whatsoever.
- Ripple (our company) has shareholders; if you want to invest in Ripple, you do not buy XRP but rather shares in Ripple.
- Unlike securities, the market value of XRP has not been correlated with Ripple’s activities. Instead, the price of XRP is correlated to the movement of other virtual currencies.
Attack on crypto
The Ripple CEO also stressed that the filing also equates to an overall attack against the cryptocurrency space.
“Let me be clear: 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. With this allegation, coupled with the SEC’s “good housekeeping seal of approval” bestowed upon ETH and BTC only (directly benefiting China), they’re creating an unfair advantage to companies here in the US – and dramatically benefiting BTC and ETH. It’s just incredible that the SEC, a U.S. regulator is in the business of picking winners in this industry (or really any industry) and disadvantaging companies here in the US,” Garlinghouse wrote.