Ripple Labs has finally secured a win against the SEC in its two and a half year long battle for XRP against the regulator. However, its not a complete win.
In the ruling by NY Southern District Court, Judge Analisa Torres has ruled that Ripple's original coin sale to the public was not contravention to rules as it was not a security.
However, the sale of XRP to institutional investors might have been a security offering.
The ruling is a partial win to Ripple Labs and all cryptocurrency issuers including Tron Foundation which is also one of the accused of a similar nature in another case.
Ripple and SEC had earlier agreed to summary judgements and have filed motions with their lawyers. A summary judgement is completely based on documents and merits rather than circumstances and witness statements which happens in a trial judgement.
The judge noticed all the events and also listed them in the judgement since the inception of Ripple, Ledger and XRP.
The recent judgement is partially in favor of Ripple as it reads that the initial retail sales were not security as they did not satisfy the clauses of Howey Test which is a test mandated by the US Supreme Court to decide if a financial instrument is a security or not.
Court concluded in page21, paragraph 3 that the institutional sales worth $728.9 Million were clearly security offerings. The following will help us understand how Ripple's institutional sales satisfies the Howey Test.
Therefore, it was found that Ripple's institutional sales were securities.
The judge noticed (on Page 4) that Ripple's wholly owned subsidiaries had sold XRP to institutional investors with written contracts. Institutional buyers also invested money by providing fiat (page16).
The court also notices that in institutional sales, buyers who had purchased XRP may have expected a return because of Ripple's marketing efforts and its development of use cases thereby satisfying a clause of Howey Test of expectation of profits (page 18).
Larsen and Garlinghouse also sold Ripple from their own XRP holdings (page 5). Larsen sold XRP programmatically and made $450 Million. Garlinghouse also made $150 Million from such sales (page 5). Court found that they did not file any EDGAR filings with the SEC regarding those sales.
Finally the statement on page 22 clearly shows that the Judge found Ripple's Institutional Sales, as security.
Therefore, having considered the economic reality and totality of circumstances
Page 22, NYSD Court
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 court ruling provides much needed regulatory clarity regarding the classification of crypto assets/currencies. This may encourage innovation and may foster investor and market confidence.
The legal battle also sets a precedent for other jurisdictions and regulatory bodies. This will also boost other players in the market by giving them a legal cushioning against arbitrary actions of the State/Govts./Regulators.
On the aspect of securities regulations (limited to US) – it will have a significant impact on regulatory compliances as securities are subject to specific regulatory requirements and regulations.
Additionally, a ruling like such will also strengthen Ripples legal position and may prompt the SEC to reassess their approach in classifying cryptocurrencies as securities.
Chandan Goswami
Web3 legal expert, based out of Delhi.
Overall, there was a partial win for Ripple Labs which gained from the ruling that its retail sales were not security offerings and did not violate laws. However, the SEC won the institutional sales part where those sales were termed as securities by the court.
The court also noticed that personal sales by Garlinghouse and Larsen were also violating laws because they did not submit the EDGAR filing with the SEC.
Disclaimer: Voice of Crypto aims to deliver accurate and up-to-date information, but it will not be responsible for any missing facts or inaccurate information. Cryptocurrencies are highly volatile financial assets, so research and make your own financial decisions.