The U.S. Securities and Exchange Commission (SEC) has filed a lawsuit against Ripple. The agency alleges that the California blockchain company sold unregistered securities in the form of XRP tokens to retail investors over seven years.
SEC charges Ripple and two executives with conducting $1.3 billion unregistered securities offering https://t.co/3VP23RpSyV
— SEC_News (@SEC_News) December 22, 2020
The SEC said that over this period Ripple raised $1.3 billion. In the screenshot below you can see that retail-investor sales exceeded the institutional figure.
They sold more to the XRP army than they did to actual institutions LMFAO jesus pic.twitter.com/Vs3iJgRXZ7
— KING CO฿IE 🌙 (@CryptoCobain) December 22, 2020
The defendants named in the suit also include CEO Brad Garlinghouse and co-founder Chris Larsen, whom the agency describes as “large holders of the security.” According to the filing, the two together sold tokens worth $600 million. Garlinghouse publicly spoke of being “very long,” hinting that he was holding his tokens, while actually selling them.
Garlinghouse often talked about how he was «very long» XRP without disclosing that he was selling 321 million XRP to lock in a fortune. pic.twitter.com/53dd9ENTEQ
— Nathaniel Popper (@nathanielpopper) December 22, 2020
Ripple paid for various services with tokens, including market making, according to the Commission.
According to the filing, the XRP-based payment network (On-Demand Liquidity, ODL) attracted only 15 money-transfer companies, none of them banks. The reason, allegedly, is the high costs that ODL is meant to solve. The SEC found that the California company subsidises the use of this solution for clients, making the arrangement attractive for them. For example, in the second quarter of this year MoneyGram received $15 million from Ripple in the form of incentives.
Ripple’s CEO often talked up the value of XRP by citing the intense interest from the financial industry.
The SEC says that today only a few companies are using it and they are only doing so because of big payments from Ripple. pic.twitter.com/0Bnx0tzJ7Z
— Nathaniel Popper (@nathanielpopper) December 22, 2020
This suggests that Ripple was effectively paying clients to secure volumes on ODL.
Perhaps the single most damning details from the Ripple complaint:
The main financial company using XRP, a money transmitter, told Ripple it was much more expensive than alternatives and only agreed to use it because Ripple was paying it to do so. pic.twitter.com/h9ZJVnGAQC
— Nathaniel Popper (@nathanielpopper) December 22, 2020
The document also cites Ripple’s chief technology officer David Schwartz:
“The public strategy of Ripple was to do whatever was necessary to maximise the price of XRP during the period that would allow us to sell what we have.”
The suit will be heard in the federal court in the Southern District of New York. The SEC accuses the defendants of violating the registration provisions of the Securities Act of 1933 and seeks a court order barring further sales, the return of all funds raised with restitution and civil penalties.
XRP’s price reacted to the news with a sharp drop.
XRP/USD, hourly chart. Data: TradingView.
As reported earlier, Ripple warned the community about the impending suit in advance.
Even before the filing, Garlinghouse said the case was an attempt by outgoing SEC Chair Jay Clayton to curb innovation in the Bitcoin and Ethereum industries. In one filing, Ripple describes itself as “a better alternative to Bitcoin.” The company also calls Bitcoin and Ethereum “China-controlled” virtual currencies.
Ripple declares itself «a better alternative to Bitcoin» and Bitcoin and Ether «Chinese-controlled» in a last ditch effort to save themselves. Have you no modesty @Ripple? No shame?https://t.co/GqRzoKaGuK pic.twitter.com/81zOM9k2uN
— Fred Ehrsam (@FEhrsam) December 22, 2020
In the view of the executive, Trump administration officials are trying in a parting shot to harm the industry. He expects greater understanding from the Biden administration — he was a donor to its campaign.
Ripple is ready for the court battles and has pledged to stand up for the entire industry.
In late November, Garlinghouse said that recognition of XRP as a security in the United States would not undermine the company’s business, since 90% of RippleNet’s customers are located abroad. A month earlier Larsen warned that Ripple would leave the United States because of the “terrible regulatory lag.”
This is not the first suit against the company — it has been in litigation with investors who believe XRP is an unregistered security for two years. Ripple and Garlinghouse are named defendants in the Bitcoin Manipulation Abatement LLC suit, overseen by attorney Pavel Pogodin.
In December 2019, Ripple closed a $200 million Series C funding round. At the time, the company was valued at $10 billion.
SEC against Ripple by ForkLog on Scribd
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