The chief compliance officer at Ripple Labs allegedly warned company leaders on multiple occasions that its marketing of its cryptocurrency offering, XRP, could lead the Securities and Exchange Commission (SEC) to classify it as a security.
The CCO is said to have advised company leaders Ripple should carefully reconsider how it marketed XRP to investors, the public, and its own employees so as to avoid having to comply with federal securities laws, which would require Ripple to open its finances to public scrutiny.
Company leaders brushed those warnings aside, according to a lawsuit filed by the SEC on Tuesday in U.S. District Court for the Southern District of New York. The SEC alleged Ripple Labs illegally raised $1.3 billion by selling 14.6 billion units of XRP since 2013 without registering the cryptocurrency as a security, as required by the agency. Ripple Labs, a San Francisco-based company doing business as Open Coin, maintained XRP should be considered digital currency, not an investment that would be classified as a security.
But with its lawsuit, the SEC indicated it considers XRP a security and subject to federal securities laws. Ripple Labs’ repeated failure to file an annual registration statement about XRP left investors without the information they needed to make informed choices about its value, the SEC said. The lawsuit also named current Ripple Labs CEO Bradley Garlinghouse, as well as Christian Larsen, the company’s co-founder and executive chairman of its board of directors, as defendants in the case.
“Because Ripple never filed a registration statement, it never provided investors with the material information that every year hundreds of other issuers include in such statements when soliciting public investment,” the SEC said in its lawsuit. “Instead, Ripple created an information vacuum such that Ripple and the two insiders with the most control over it—Larsen and Garlinghouse—could sell XRP into a market that possessed only the information Defendants chose to share about Ripple and XRP.”
The SEC’s lawsuit seeks ”injunctive relief, disgorgement with prejudgment interest, and civil penalties,” according to a press release.
XRP is the third largest cryptocurrency by market cap, after Bitcoin and Ethereum, according to cryptocurrency news site CoinDesk. XRP has lost approximately a third of its value in two days. Several small exchanges have delisted the digital currency from their platforms, CoinDesk reported.
Outgoing SEC Chairman Jay Clayton told CNBC in 2019 that Bitcoin is not a security but rather a “sovereign currency” like the U.S. dollar, the yen, or the euro. At the time, he refrained from comment on whether Ethereum or XRP should be classified as securities, although other former regulators indicated initial coin offerings like Ethereum and XRP should be treated as securities, not digital currency.
In March 2017, Ripple’s then-chief compliance officer explained to Garlinghouse in an email that “XRP certainly has some ‘securities-type’ characteristics and we do need to hone our playbook/messaging,” according to the lawsuit. A month later, the same CCO wrote an email to Garlinghouse asking “to make sure the verbiage [in employee offer letters regarding XRP notional value] doesn’t put us at risk of XRP sounding like a security.”
According to the SEC, Ripple Labs promoted XRP as a “speculative investment,” and Garlinghouse continued to make public statements that “make XRP sound like a security,” even though internally the company was trying to weed out any suggestion in marketing materials and public statements that XRP was an investment.
Attempts to contact Ripple for comment were unsuccessful.