The SEC, in one of the Commission’s final acts under the leadership of Chair Jay Clayton, approved enforcement action aimed at Ripple Labs, Inc. (“Ripple”) and two of its executives, Brad Garlinghouse and Chris Larsen. The SEC filed its complaint on December 22, 2020 in the Southern District of New York, alleging that sales of XRP during a period ranging from 2013 through 2020 constitute an ongoing unregistered offering of securities in violation of Section 5 of the Securities Act of 1933, as amended.
In a significant departure from prior actions by the SEC, the complaint names Garlinghouse and Larsen as individual defendants, both for their role in allegedly offering and selling XRP in violation of Section 5, as well as their role in allegedly aiding and abetting Ripple’s violation of securities laws.
The complaint revisits common themes from prior enforcement actions to support its assertion of the existence of an investment contract. Similar to prior enforcement action, the complaint focuses on facts and circumstances suggesting that the ongoing efforts of others (here, the alleged efforts of the executive team) lead investors to expect profits from such efforts. These efforts, the SEC asserts, included: (i) promotion of future liquidity, (ii) efforts from Ripple to ensure significant secondary market trading as a source of increased demand, including securing and paying for exchange listings and trading activity, (iii) sales or distributions of XRP with knowledge and expectation that the XRP would immediately be resold, and (iv) broad sweeping characterization of many activities as designed to immediately or in the future increase demand for XRP — characterized as a fungible, limited supply digital asset as only designed to stimulate and support speculation in XRP. The SEC again argues that the investment contract analysis should be determined based upon what the SEC describes as an ongoing distribution spanning from the initial launch and sale of XRP in 2013 to sales of XRP as recently as 2020. We will further detail the SEC’s arguments and potential incremental regulatory insight to be gleaned from this complaint in our upcoming Client Alert.