Key Takeaways:
- US Court ruled against SEC filing an appeal to the July 13 ruling.
- The said ruling confirmed the applicability of the Howey Test.
- Despite the pro-Ripple course of the lawsuit, the company still violated the “Institutional Distribution” clause. What to expect?
YEREVAN (CoinChapter.com) — On Oct. 3, US District Judge Analisa Torres ruled against the US Securities and Exchange Commission’s (SEC) motion to appeal the pro-Ripple ruling.
Judge Torres confirmed her prior decision.
In July, Judge Torres assessed that sales of XRP and “other distributions” did NOT constitute a violation of US Securities laws, as claimed by the SEC.
Did You Know? XRP's status as a "security" became a cornerstone of the lawsuit filed in December 2020. The federal agency claimed that by not registering with the SEC, Ripple violated US Securities laws and distributed XRP with an unfounded promise of gain. By ruling the token out of the "security" jurisdiction, Judge Torres knocked down one of the prosecution's main pillars.
The SEC had sought permission to appeal the Judge’s findings, saying an appeal would be important to a “large number” of lawsuits. However, the Judge found no “substantial ground for difference of opinion” and disagreed that an appeal would materially advance the case toward a conclusion.
Howey test still applicable to Ripple
Ripple chief executive Brad Garlinghouse, one the defendants in the case, tweeted on the decision.
The SEC’s request to file an interlocutory appeal is DENIED. I’m not a lawyer, but it seems the Court just told the SEC: You asked me to apply the “Howey” test, I did, and like it or not, you lost.
said the CEO.
The mentioned Howey test became a prosecution angle for the SEC but partially failed with the July ruling.
It refers to the US Supreme Court case for determining whether a transaction qualifies as an “investment contract” and, therefore, would be considered a security. If so, it would be subject to disclosure and registration requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934.
Under the Howey Test, an investment contract exists if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” The test applies to any contract, scheme, or transaction.
Thus, certain cryptocurrencies and ICOs may be found to meet the definition of an “investment contract” under the test.
By denying the SEC’s motion for an interlocutory appeal, Judge Torres closed any further discussion on XRP’s “security” status. Ripple Chief Legal Officer Stuart Alderoty agreed, calling the July 13 ruling the “law of the land.” However, the crypto startup could still face penalties.
Both Ripple and SEC have some explaining to do
The discussion around “unlawful” XRP distributions revolved around three main distribution channels – “Institutional,” “Programmatic,” and “other.” The court found no violation in Programmatic and Other distributions, meaning direct sales to retail investors.
However, the cited ruling read that Ripple violated securities laws with Institutional distribution, i.e., “sales of XRP to sophisticated individuals and entities under written contracts.”
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.
read the ruling.
Also, in the same ruling, the court rejected another fundamental claim by Ripple – the “fair notice.” I.e., the defendants claimed the SEC did not make the necessity of registration with the agency clear enough. Judge Torres disagreed.
The case law that defines an investment contract provides a person of ordinary intelligence a reasonable opportunity to understand what conduct it covers. Howey sets forth a clear test for determining what constitutes an investment contract.
Judge Torres asserted.
Meanwhile, “Institutional sales” remain a bone in the defense’s throat despite the overall pro-Ripple course of hearings. So, the court may rule penalties for both sides.
Notably, any outcome will take US legislation a step closer to legally defining digital assets – one of the main goals of crypto supporters. According to the Oct. 3 ruling, both parties will appear in court for a “final pretrial conference” on April 16, 2024. Thus, XRP bulls will have to hold their horses.
