August 9, 2024
Judge’s ruling opens door for crypto, blockchain, digital asset insiders and others with inside information about fraud and misconduct to blow the whistle.
On August 7, 2024, the U.S. Securities and Exchange Commission (SEC) secured a ruling in a groundbreaking case, SEC v. Ripple Labs Inc., et al., that certain cryptocurrency and digital asset token transactions must be registered with the SEC. Failure to register such transactions under Sections 5(a) and 5(c) of the Securities Act of 1933 will result in enforcement actions and penalties.
Specifically, the court ordered that Ripple Labs Inc., (Ripple) a privately held company and one of the world’s largest enterprise blockchain solutions for global financial institutions, businesses, and governments, pay a $125 million civil penalty for its failure to register institutional sales of its XRP token in 1,278 transactions in violation of the federal securities laws. The court also permanently enjoined Ripple from ongoing sales of XRP without registering them as securities, lest it continue to violate the federal securities laws. Simultaneously, the court denied the SEC’s request for an additional $876 million disgorgement.
While both sides are claiming victory, the court’s decision, nevertheless, sets a precedent for how cryptocurrency and blockchain developers can legally raise funds from institutional investors moving forward. This decision is also a call to action for potential whistleblowers.
A Call to Action for Whistleblowers
Originally filed in 2020, the SEC alleged that Ripple made more than $1 billion in unregistered sales of its XRP token. In July 2023, the court issued a 34-page summary judgment ruling, finding the XRP token was a security when it was sold directly to institutional investors but not when it was sold on public exchanges in blind transactions.
Going forward, cryptocurrency and blockchain developers looking to raise funds from institutional investors must register their transaction under Sections 5(a) and 5(c) of the Securities Act of 1933 (Securities Act).
The judge’s ruling opens the door for would-be whistleblowers in the crypto, blockchain, and digital asset markets to come forward and blow the whistle based on their knowledge of possible federal securities law violations, in addition to coming forward to report illegal sales of securities, like the unregistered transactions here – Ripple’s XRP offerings to institutional investors.
With this long-awaited ruling, whistleblowers, now more than ever, can play a pivotal role in holding crypto, blockchain, and digital asset companies to account to ensure greater market confidence.
What are Sections 5(a) and 5(c) of the Securities Act of 1933?
The Securities Act serves to ensure that companies register securities with the SEC, disclose material information about those securities to the public, and do not engage in fraud. Section 5 requires companies (issuers) to file a registration statement with the SEC when publicly offering securities.
Section 5 (a) and (c) center on the SEC’s review and approval of the registration statement, while regulating the issuers’ activities, including communications, during this review.
Case Background
In 2020, the SEC alleged that Ripple raised more than $1.3 billion in 2013 by selling XRP in an unregistered security offering to investors.
Ripple, which touts American Express, BBVA, and BMO among its clients, argued that XRP should not be treated as a security. Ripple maintained that XRP does not meet the criteria set out by the Howey Test, a standard used to determine whether a financial instrument is classified as a security.
One of the first of its kind, the lawsuit sent shockwaves through the cryptocurrency sector when blockchain projects had been operating with little regulatory oversight.
As a result, the August 7 ruling sets a precedent going forward for the industry. While the SEC will have authority over sales to institutions, crypto exchanges can allow cryptocurrency trades to “programmatic buyers,” i.e., algorithmic trades to the public, with the understanding that cryptocurrency transactions on exchanges are not securities transactions.
What if I witness misconduct or suspect fraud?
If you observe possible misconduct or fraud violation of the Sections 5(a) and 5(c) of the Securities Act of 1933, it is critical that you inform the SEC.
The SEC will often pay monetary awards to whistleblowers who voluntarily provide the agency with original information about violations of the federal securities laws.
How do I report this misconduct or fraud to the SEC?
If you suspect misconduct or fraud, contact a lawyer, such as a member of Cohen Milstein’s Whistleblower practice, who can counsel you on the Whistleblower process and help you complete and submit the SEC’s tip, complaint, and referral form (Form TCR).
Such consultations are confidential and free-of-charge.
What type of information is needed to report fraud or misconduct to the SEC?
In addition to your personal observations and a completed Form TCR, the SEC requires supporting information that is original and not in the public sphere.
What if I’m not a company insider?
You do not need to be a company “insider” (like an employee) to witness or report possible fraud or misconduct. Other market participants or victims of fraud or misconduct who observe these actions committed by others may also qualify as whistleblowers.
Does the SEC offer a whistleblower award for reporting fraud or misconduct?
Yes. If your information leads to a successful SEC enforcement action resulting in more than $1 million in monetary sanctions, you will receive an award ranging from 10-30% of any amount collected.
Where do I find more about reporting fraud and becoming a whistleblower?
The SEC’s Office of the Whistleblower provides comprehensive guidelines on the reporting fraud and the whistleblower process.
You can also contact a member of Cohen Milstein’s Whistleblower practice for a confidential and free-of-charge consultation.
About the Author
Christina McGlosson, special counsel in Cohen Milstein’s Whistleblower practice, focuses exclusively on Dodd-Frank Whistleblower representation. She is the former acting director of the Whistleblower Office in the Division of Enforcement at the U.S. Commodity Futures Trading Commission. She was also a senior attorney in the SEC’s Division of Enforcement, where she assisted in drafting the SEC rules to implement the whistleblower provisions of Dodd-Frank.
Christina represents whistleblowers in the presentation and prosecution of fraud claims before the SEC, CFTC, FinCen, as part of the U.S. Treasury, the Department of Justice, and other government agencies.
Christina McGlosson, Special Counsel: Dodd-Frank Whistleblower Practice
Cohen Milstein Sellers & Toll PLLC
1100 New York Avenue, NW
Washington, DC 20005
E: cmcglosson@cohenmilstein.com
T. 202-988-3970
Advertising Material. This content is informational in nature and should not be read or interpreted as legal advice. Should you need legal advice, please contact a lawyer.