On August 18, 2023, the U.S. Securities and Exchange Commission (SEC) filed a motion to certify an interlocutory appeal of two rulings of the U.S. District Court for the Southern District of New York in Securities and Exchange Commission v. Ripple Labs, Inc., et al. Specifically, the SEC seeks to challenge the District Court’s July 13, 2023 Order (the Summary Judgment Order) that Ripple’s programmatic sales of its XRP token on digital asset exchanges did not violate U.S. securities laws because retail buyers purchasing XRP on digital asset exchanges did not have the same expectations when purchasing XRP as institutional investors purchasing directly from Ripple.
Now, if SDNY Judge Analisa Torres determines that the Summary Judgment Order “involves a controlling question of law as to which there is substantial ground for difference of opinion” and that an immediate appeal of the interlocutory order would “materially advance the ultimate termination of the litigation,” a challenge to one of the most significant court rulings on digital assets in recent memory may be headed for appeal.1
SEC v. Ripple Labs, Inc., et al.: Summary Judgment
The appropriate classification of certain tokens and crypto assets has long plagued both industry participants and regulators and, pulling this tension into the spotlight, in December 2020, the SEC charged Ripple and two of its executives with offering securities, in the form of the XRP token, in violation of the Securities Act. The crux of the SEC’s claim was that the XRP token was, in fact, a security and that, as such, Ripple was offering securities without being previously registered. The SEC accused the company of selling approximately $1.3 billion worth of unregistered securities in the form of the XRP token, which was created by Ripple in 2012.
Following significant briefing, and as has been widely reported, on July 13, 2023, SDNY Judge Analisa Torres ruled on dueling summary judgment motions made by Ripple and the SEC and held that Ripple did not violate federal securities laws by selling its XRP token on digital asset exchanges; a ruling which sent XRP stock soaring in its immediate aftermath. Highlighting the impact of this ruling, Ripple CEO called it “an unequivocal win for Ripple and for crypto in the U.S.”
While heralded as a major victory for the crypto industry, Judge Torres’s ruling did not leave the SEC empty-handed. Setting aside those XRP tokens sold on digital asset exchanges, the Court found that those same tokens, when sold to hedge funds and other sophisticated investors amounted to an unregistered sale of securities. Specifically, and in addressing the much-discussed Howey test for whether an economic arrangement can be classified as an investment contract—i.e., a security—for purposes of federal law, Judge Torres ruled that, in offering XRP tokens to institutional buyers, the company was “pitching a speculative value proposition” with potential profits from XRP to be derived from Ripple’s entrepreneurial and managerial efforts. In contrast, buyers on digital asset exchanges “could not have known if their payments of money went to Ripple, or any other seller of XRP.”
Potential Ripple Appeal and Impact on Crypto Industry
It is the Court’s distinction between the sale of the RXP token to retail v. programmatic buyers which the SEC seeks to challenge by way of its interlocutory appeal. Specifically, the SEC, in its Motion and Memorandum in Support, seeks to challenge:
- The ruling that Ripple’s programmatic offers and sales of XRP over crypto asset trading platforms could not lead investors to reasonably expect profits from the efforts of others, and
- The ruling that Ripple’s other distributions of XRP as a “form of payment for services” was legally insufficient to constitute an “investment of money” under the Supreme Court’s ruling in Howey.
In support of its Motion, the SEC directly points to the subsequent SDNY ruling in SEC v. Terraform Labs, in which “the Court decline[d] to draw a distinction [where] coins sold directly to institutional investors are considered securities and those sold through secondary market transactions to retail investors are not” because “Howey makes no such distinction.”2 In Terraform, SDNY Judge Jed Rakoff denied the Company’s motion to dismiss and held, in seeming contravention of the prior ruling in Ripple, that the cryptocurrencies at issue may be securities under the Howey test and that their sale to institutional investors or on the secondary market did not necessarily impact this analysis.
It is precisely this uncertainty as it relates to the categorization of digital assets/tokens which may impact the SDNY’s willingness to grant the SEC’s Motion for Interlocutory Appeal. As stated by the SEC in its Memorandum, “[t]his legal question is at issue in a number of pending cases, and a Second Circuit ruling will have precedential value.” Specifically, the SEC points to the current cases pending against Coinbase and Dragonchain as those which may be impacted by the Summary Judgment Order.
Ripple now has until September 1, 2023, to file its response to the SEC’s request.
1 28 U.S.C. § 1292
2 SEC v. Terraform Labs Pte. Ltd., 2023 WL 4858299, at *15