A federal court in Manhattan fined Ripple $125 million for selling unregistered securities to institutional investors. Wednesday’s ruling is
Unless the SEC appeals, the ruling is final
The case is important for the financial services industry because in its early days
In its 2020 complaint, the SEC alleged that Ripple and its executives sold 14.6 billion XRP units for more than $1.38 billion to fund the company’s operations and amass personal wealth without registering their XRP sales with the SEC. The SEC sought to permanently ban Ripple and its executives from selling unregistered XRP tokens, force the defendants to disgorge “all ill-gotten gains” from the transactions, and pay unspecified civil monetary penalties.
In a ruling on the case last year, Judge Analisa Torres said Ripple’s sales of its XRP token to institutional investors constituted a securities investment contract – a victory for the SEC and the reason for the $125 million fine. However, the judge also said that the trading activity when ordinary investors buy XRP on the secondary market through crypto exchanges is not securities trading.
In her statement, Torres said Ripple could not issue any more XRP without registering it with the SEC. However, there is a lot of XRP out there. Ripple’s founders initially created 100 billion XRP, some of which they gifted to themselves and the company, and some of which they offer for sale monthly.
“If they want to go to market and raise more XRP and sell it to investors, they would have to register with the SEC, but it doesn’t look like they’re doing that yet,” said Robert Le, crypto analyst at Pitchbook.
In a post on X, formerly Twitter, Ripple CEO Brad Garlinghouse called the judge’s decision a victory for his company. “The SEC asked for $2 billion and the court reduced their demand by ~94%, recognizing they had gone too far,” he wrote. “We respect the court’s decision and have the confidence to continue to grow our company. This is a victory for Ripple, the industry, and the rule of law. The SEC’s backlash against the entire XRP community is over.”
But the SEC also thought it had won. A spokeswoman pointed out that the court granted the SEC’s request for relief, including an injunction prohibiting Ripple from further violating securities laws. The fine is more than 12 times the amount proposed by Ripple.
“The court also addressed the egregiousness of Ripple’s conduct, finding that there is no doubt that the repeated, highly lucrative violation of Section 5 is a serious offense,” the spokeswoman said Thursday. “As court after court has found, the securities laws apply when companies offer and sell investment contracts, regardless of the technology or designations they use.”
Other judges have interpreted the rules differently than Torres, Le said.
“It’s not unanimous and we won’t know until it goes to the higher courts – the appellate courts or even the Supreme Court,” he said. “Then we’ll get the final decision on what the actual view is on secondary trading in crypto assets, whether they’re securities or not.”
The final decision in this case does not bring any clarity to the crypto world.
“If anything, it only adds to the confusion,” Le said.