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.
We will continue to evaluate the impact of this decision. If you have any questions about this decision, or any other digital asset related issue, please contact our Digital Assets Industry Group.