Capital markets Legal and IP News

Ripple partially prevails in SEC litigation over whether XRP is a security

ripple xrp security sec

Today a judge in the Southern District of New York released her ruling on whether XRP is a security after the Securities and Exchange Commission (SEC) sued Ripple at the end of 2020. The ruling gave wins to both sides, but the bigger victory went to Ripple.

The judge looked at three separate sets of sales of XRP to: 

  • institutions (SEC wins)
  • programmatic sales to public buyers via exchanges (Ripple wins)
  •  ‘other distributions’ (Ripple wins).

In the critical finding, District Judge Analisa Torres concluded that the XRP sales by Ripple via exchanges to public buyers were indistinguishable from secondary market sales. The buyers would not have known their payment was going to Ripple. She deemed that investors needed to believe their money was going to Ripple to constitute an investment contract under the “Howey test” for a security.

“The Court concludes that Ripple’s Programmatic Sales of XRP did not constitute the offer and sale of investment contracts,” states the ruling.

Regarding “other distributions” to employees and for Ripple’s Xpring initiative to develop new software, these failed the first Howey test as there was no investment of money.

However, regarding the sales of XRP to institutions, the SEC prevailed. The court was satisfied that the institutional sales met all three prongs of the Howey Test, and in that case Ripple made an unregistered sale of securities.

Good for the crypto world?

Despite the apparent good news, this ruling could be problematic for the crypto community. Many existing tokens have avoided sales to the public to sidestep the Howey Test. However, they have often sold tokens to venture capital firms. This ruling puts a questionmark over these sales.

It’s also very likely that the SEC will appeal the ruling, and there is an outstanding charge that was no included in the summary judgement and will be heard by a jury.

However, it does provide a blueprint for potential future issuances: 

  • Startups should sell equity for initial funding to institutional investors
  • Issue tokens as giveaways
  • Subsequently issue tokens via exchanges, but commingled with secondary sales. As opposed to an Initial Exchange Offering (IEO) or its DeFi equivalent, an IDO.

The XRP price surged by a third in response to the ruling.

Image Copyright: maximsafaniuk / 123rf