On December 22, 2020, the U.S. Securities and Exchange Commission (“SEC”) filed an action against Ripple Labs Inc. (“Ripple”), Christian Larsen, the company’s co-founder, executive chairman of its board, and former CEO; and Bradley Garlinghouse, the company’s current CEO (together, the “Defendants”) for conducting an unregistered securities offering with a total value of US$1.38 billion.
The Defendants have sold over 14.6 billion units of Ripple’s digital asset known as “XRP” to investors in the U.S. and worldwide for cash or other considerations since the beginning of 2013.
The SEC has taken the position that XRP are “investment contracts” and therefore securities under the Securities Act of 1933. Because the Defendants did not view XRP to be a security, they did not seek to register XRP with the SEC and accordingly failed to meet the SEC’s requirements for securities offerings. Similar to the previous enforcement actions against Kik Interactive Inc., the SEC is seeking a permanent injunction, disgorgement of ill-gotten gains, and civil penalties against the Defendants.
This case holds implications for participants throughout the entire crypto asset industry. Issuers of digital assets are faced with yet another conservative interpretation of the Howey Test, a 75-year old test believed by many to be ill-suited for crypto assets. Crypto exchanges and brokerages are left in limbo, uncertain whether to continue supporting a popular and well-performing asset for fear of attracting regulatory scrutiny themselves.
Ripple was founded in 2012. It developed and manages the XRP ledger, an underlying peer-to-peer database on