Portfolio Media . Inc . | 230 Park Avenue , 7 th Floor | New York , NY 10011 | www . law360 . com Phone : + 1 646 783 7100 | Fax : + 1 646 783 7161 | customerservice @ law360 . com
What SEC Retreat In Ripple Case Means For Crypto Regulation
By Keith Blackman ( November 22 , 2023 , 2:20 PM EST )
The U . S . Securities and Exchange Commission has made no secret of its regulation-byenforcement approach to cryptocurrency policy , choosing to craft its strategy case-bycase rather than through rulemaking .
While this flexible tactic undoubtedly has some benefits , the SEC ' s recent inability to hold two Ripple Labs Inc . executives personally responsible for alleged securities law violations demonstrates the limits of its piecemeal approach . It remains to be seen whether the SEC ' s misadventure is a one-time anomaly or a harbinger of things to come .
SEC Drops Charges Against Ripple Execs
Keith Blackman
The SEC filed an enforcement action against Ripple Labs and two of its executives , Brad Garlinghouse and Chris Larsen , on Dec . 31 , 2020 , in the U . S . District Court for the Southern District of New York .[ 1 ]
The SEC alleged that Ripple raised more than $ 1.3 billion by selling XRP tokens in unregistered security offerings to investors in the U . S . and worldwide . Additionally , Ripple allegedly offered billions of XRP in exchange for noncash services like market-making services and labor . The SEC accused Garlinghouse and Larsen of aiding and abetting Ripple ' s violations of the securities laws .
The SEC ' s case against Ripple Labs and its executives hit a significant snag last summer , as the court severely limited the SEC ' s case on summary judgment . U . S . District Judge Analisa Torres concluded that Ripple ' s XRP token was not a security when it was sold on public exchanges and , therefore , did not need to be registered . Judge Torres did , however , rule that Ripple ' s sales to institutional buyers like hedge funds constituted transactions of unregistered investment contracts in violation of Section 5 of the Securities Act .
With respect to individual liability for Garlinghouse and Larsen , the court reserved for a jury to decide whether the executives knew that XRP was a security when making the institutional sales . In early October , the court ruled that its summary judgment ruling was not immediately appealable .
On Oct . 19 , the SEC unexpectedly dropped its remaining aiding and abetting claims against Garlinghouse and Larsen .
Impact of SEC ' s Failure to Regulate