SEC Sues Ripple Over 7-Year, $1.3B ‘Ongoing’ XRP Sale

The US Securities and Exchange Commission believes that Ripple Labs violated federal securities laws in selling the XRP cryptocurrency to retail customers.
According to a lawsuit filed Tuesday, Ripple raised $ 1.3 billion to retail investors through the ongoing sale of XRP over a seven-year period. Brad Garlinghouse, CEO of Ripple, announced Monday that the SEC has notified his company of the impending lawsuit and has released the payment company's Wells Response, a document designed to tell the SEC why certain activities are not violating U.S. securities laws have violated.
The San Francisco-based fintech company has long claimed that XRP is cryptocurrency separate from Ripple, the company. The cryptocurrency was often referred to as "ripple" until the beginning of 2018 and communicated a logo to the company by the end of the year.
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Related topics: Bitwise liquidates XRP position in Crypto Index Fund after SEC lawsuit against Ripple
The impact could be far-reaching: Several exchanges are listing XRP in the U.S., with only one deciding to delist the cryptocurrency ahead of the lawsuit on Tuesday. If the SEC prevails, platforms that continue to list the crypto may need to register as stock exchanges.
According to the complaint, which named CEO Brad Garlinghouse and Chairman Chris Larsen as defendants in addition to Ripple Labs, Ripple violated Sections 5 (a) and 5 (c) of the Securities Act of 1933 by failing to register XRP as collateral or looked for an exception.
"During a year of unregistered offering of securities (the 'Offering'), Ripple was able to raise at least $ 1.38 billion through the sale of XRP without providing the type of financial and management information normally found in registration statements and subsequent regular and current filings are included. Said the filing. "Ripple used this money to fund its business without disclosing how it did so or the full extent of its payments to others in its efforts to develop a" use "for XRP and to maintain the secondary XRP trading markets to support."
Ongoing debate
The status of XRP under US securities law has been the subject of debate for several years.
Related: Hong Kong Trading Platform OSL Suspends XRP Services As SEC Sues Ripple
The Crypto Rating Council, a joint venture led by Coinbase and backed by cryptocurrency exchanges such as Bittrex, Kraken, and OKCoin, rated XRP as security rather than non-security.
The group has determined that its ratings should not be construed as legal advice, but rather as its members' assessment of how different cryptocurrencies might fall within US regulation. CrossTower, one of its members, delisted XRP on Tuesday after news of the lawsuit first broke, although other trading platforms have yet to weigh whether they will consider doing so.
XRP, supposedly centralized by the control of a single company, has even been seen as an attractive aspect by some. Wall Street veteran Brian Kelly told CNBC in 2018, "I like the fact that multiple banks are using it and have a company ... that is out there trying to add value to the currency."
See also: An SEC victory in the Ripple case would make XRP "unwieldy", say market professionals
On the flip side, former Commodity Futures Trading Commission (CFTC) chairman Christopher Giancarlo said he believed that XRP should be viewed "as a currency or a medium of exchange," not a security.
Giancarlo cited the Howey test in his argument - a Supreme Court case that was used as the main standard for judging whether or not something is a security.
In short, Howey notes that something is a security when it is 1) an investment of money in b) a joint venture with c) a reasonable expectation of profits resulting from the efforts of others. According to Giancarlo, XRP investors have not been promised either a return or a share of Ripple's profits.
The SEC sees it differently.
"At all relevant times during the offering, XRP was an investment contract and therefore a security subject to the registration requirements of federal securities laws," the lawsuit said.
According to the SEC, the defendants have allegedly said that the main reason anyone might buy XRP is to speculate on its price. Ripple employees were quoted in the complaint as early as 2013.
"Similarly, in its official application to NYDFS for XRP II in 2016, Ripple admitted that buyers were buying XRP for speculative purposes," the complaint read.
Information asymmetry
Much of the SEC's complaint alleges that there was asymmetric information about XRP. The defendants allegedly "created an information vacuum" that allowed Ripple, Larsen and Garlinghouse to sell XRP to a market that did not have much information about the cryptocurrency.
"Defendants continue to hold significant amounts of XRP and - without a valid registration statement - can continue to monetize their XRP while using the information asymmetry generated in the market for their own benefit, which poses a significant risk for investors," the complaint said .
David Schwartz, CTO of Ripple, is quoted in the complaint as saying that Ripple's "publicly announced strategy" was "to do everything possible to maximize the price of XRP over at least the time we spend selling the XRP need".
"The people who created XRP are pretty much the same as the people who created Ripple, and they originally created Ripple to distribute XRP, among other things," he said in a tweet (although he in the complaint as "Cryptographer-1" was identified).
Ripple even knew that XRP could meet the requirements of a security, the SEC claimed, saying the company received two memos from an "international law firm" in 2012 that stated there was some risk to that assessment.
Many of the comments in the SEC's complaint appear to be consistent with or similar to statements made in a two-year-old investor lawsuit filed against the company.
The SEC also frequently cites internal emails and communications between Ripple employees and board members in its complaint.
Part of this information vacuum is the fact that On-Demand Liquidity, a Ripple product that uses XRP, had no organic or market-driven volume, according to the SEC.
"Although Ripple is touting ODL as a cheaper alternative to traditional payment methods, at least one money transmitter (the" Money Transmitter ") found it to be much more expensive and therefore not a product it would want to use without significant compensation from Ripple," the complaint said.
It appears to be related to MoneyGram; Most of the XRP trade with ODL between "early 2019 and July 2020" was handled by the unnamed broadcaster. Ripple invested in MoneyGram in June 2019. As it was publicly announced, the payment company MoneyGram has compensated for the use of XRP.
"From 2019 to June 2020, Ripple paid the money transmitter 200 million XRP, which the money transmitter instantly monetized by selling XRP in the public market, usually on the days it received XRP from Ripple. The money transmitter publicly announced that it had made over $ 52 million in fees and incentives from Ripple by September 2020, "the lawsuit said.
The amount corresponds to the information in MoneyGram's public records.
"Ripple and Garlinghouse have not disclosed to XRP investors or the public the full extent of the incentives Ripple has given the money transmitter in exchange for its assistance in increasing XRP trading volume," the complaint read.
The SEC also claimed that Ripple paid at least 10 crypto trading platforms to list and trade XRP in 2017 and 2018. One platform received an XRP fee of 17 million in 2017, the agency said in an example. Other exchanges received incentive fees. Neither of these platforms has been registered with the SEC, although at least two are US based.
Political upheaval
The SEC lawsuit comes as the agency's head prepares to step down and the federal government undergoes a change in leadership. Chairman Jay Clayton previously announced that he would be leaving his position at the end of the year, although a specific date was not disclosed.
SEC Enforcement Director Stephanie Avakian, who founded the Commission's cyber division, also plans to leave her role by the end of the year. Avakian is quoted in a press release as saying, "We claim that Ripple, Larsen and Garlinghouse have failed to register their ongoing offering and sales of billions of XRP to retail investors, which gives prospective buyers reasonable information about XRP and Ripple's business and other important items." withheld long-term protection, which is fundamental to our robust public market system. "
This means that the new President Joe Biden can appoint an incumbent chairman to oversee the commission while his candidate, who heads the agency for a full term, passes through Congress.
Garlinghouse has previously donated to Biden's presidential campaign as well as to the previous presidential campaign of Vice President-elect Kamala Harris. In public statements, he has indicated that he is waiting to see how the new administration could deal with issues of crypto regulation.
"I'm optimistic that the situation for the XRP community will broadly improve," he told CNN's Julia Chatterley earlier this month when asked if Ripple had made a decision about whether the company was his Want to relocate headquarters outside of the United States.
Ahead of the presidential election, Garlinghouse pointed out that the SEC's lack of clarity about the legal status of XRP could make Ripple greener pastures.
Read the full complaint:
UPDATE (December 23, 2020, 12:40 AM UTC): Updated with additional context and details from the complaint.
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SEC is suing Ripple for 7 year, $ 1.3 billion "ongoing" XRP sale
SEC is suing Ripple for 7 year, $ 1.3 billion "ongoing" XRP sale
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