Judge ‘partially’ denies SEC’s claim that Ripple XRP is a security
Ripple Labs achieved a noteworthy victory in the United States District Court in the Southern District of New York on July 13 after Judge Analisa Torres ruled that that the XRP token “is not necessarily a security on its face”. However, the ruling introduces a distinction between the treatment of XRP in institutional sales versus its sales to the general public.
After carefully considering various XRP offerings and applying the Howey Test to each, the district judge granted the Securities and Exchange Commission’s (SEC) motion for summary judgment regarding Ripple’s institutional sale of the XRP token.
This implies that when XRP is used for institutional sales, it falls under the classification of a security, according to Judge Torres. The judge determined that investors who participated in the $728 million sales would have done so with the expectation of earning profits from Ripple’s efforts.
“Therefore, having considered the economic reality and totality of circumstances surrounding the Institutional Sales, the Court concludes that Ripple’s Institutional Sales of XRP constituted the unregistered offer and sale of investment contracts in violation of Section 5 of the Securities Act,” the judge wrote.
But an interesting twist occurred when the judge denied the SEC’s request concerning programmatic sales of XRP and other circumstances, including sales conducted by two of Ripple’s former and current leaders. In this context, Judge Torres ruled that XRP is not considered a security when it is sold to the broader public, defeating a substantial part of the SEC’s enforcement case.
Following the favorable development, Ripple’s XRP price surged by 66% to around 78 cents per coin on Thursday.
The ruling adds complexity to the legal understanding of XRP’s status as a security and leaves room for further interpretation and debate on the matter. But the judge’s decision that deemed XRP “not necessarily a security on its face,” sparks optimism that other alternative coins may also avoid being classified as securities.
The SEC lawsuit aimed to compel Ripple to cease offering its XRP token, contending that XRP qualified as a security and thus required additional regulatory oversight. The agency claimed that Ripple and its co-founders raised over $1.3 billion in funds through these offerings, which were conducted without proper registration as required by securities laws. The lawsuit focused on the period spanning from 2013 onwards, asserting that Ripple and its executives violated regulations by not registering these securities offerings and providing misleading information to investors.