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On July 13, 2023, in a long awaited decision in Securities and
Exchange Commission v. Ripple Labs, Inc., Bradley Garlinghouse and
Christian A. Larsen, Judge Analisa Torres of the United States
District Court for the Southern District of New York ruled on the
cross-summary judgement motions finding that Defendant Ripple
Labs’ XRP Token is not a security, handing the SEC a stunning
defeat on many arguments that have been advanced by the SEC in
multiple enforcement actions affecting issuers and exchanges of
digital assets.
The Court addressed the parties’ cross-motions for summary
judgment granting and denying each in part. Critically, the Court
found:
1. XRP, as a digital token, is not in and of itself a
“contract, transaction[,] or scheme” that embodies the
Howey test requirements of an investment contract.
2. Ripple’s Institutional Sales of XRP constituted the
unregistered offer and sale of investment contracts in violation of
Section 5 of the Securities Act because Institutional Buyers
purchased XRP directly from Ripple Labs pursuant to a contract. The
Court focused on the expectations of the Institutional Buyers
created by Ripple Labs through targeted marketing materials, as
well as the inclusion of lock-ups in the purchase agreement that
negated an inference of consumptive use.
3. Programmatic Sales (that is, sales directly to purchasers on
exchanges as “blind/bid” transactions) of XRP did not
constitute the offer and sale of investment contracts because the
sale of XRP itself is not a sale of an investment contract, because
Programmatic Buyers were buying from third party exchanges, not
Ripple Labs, and because those buyers were not relying on, or in
some cases, even aware of Ripple Labs. However, the Court did not
rule on the issue of whether secondary market sales of XRP
constitute offers and sales of an investment contract, noting that
the question was not before the Court and that the Court would be
required to analyze the circumstances and specifics of any such
sale.
4. Ripple’s Other Distributions (including distributions to
employees as compensation and to third party developers) did not
constitute an offer and sale because there was no investment of
money, and Co-Defendant Larsen’s and Garlinghouse’s offers
and sales of XRP on digital asset exchanges did not constitute the
offer and sale of investment contracts for the same reasons
applicable to Programmatic Sales.
5. There remain triable issues of fact with respect to claims
brought against Larsen and Garlinghouse for aiding and abetting
liability and thus the Court did not enter summary judgment on
those claims.
The Court rejected the Defendants’ fair notice defenses as
to the Institutional Sales, citing Howey and its progeny
as providing clear guidance, and declining to extend the
Howey test as argued by Ripple.
While the implications of this decision are still being
considered, its potential impact is broad, especially as to
regulatory actions brought against crypto exchanges, which rely on
the allegation that tokens issued as investment contracts remain
securities for secondary market transactions. Further, this ruling
could potentially ease the path for foreign issuers of investment
contracts including digital assets under Regulation S who may have
less concern about those digital assets issued as part of these
offerings coming to rest in the United States. Likewise, this
ruling may reduce concerns for issuers of digital assets as to
whether Rule 12-g’s limitation of 2000 holders applies to
holders of digital assets issued in private placements of
investment contracts that were not obtained from the issuer.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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