Sale of XRP on Exchanges Not Investment Contracts, Court Rules in SEC Case Against Ripple

Ripple's sale of XRP tokens on exchanges and through algorithms did not constitute investment contracts, but the institutional sale of the tokens did violate federal securities laws, a on Thursday.

The court published the conclusions in an order partially granting a motion for summary judgment in the seminal U.S. Securities and Exchange Commission case against the blockchain platform. The SEC in 2020 filed suit against the firm and its executives CEO Brad Garlinghouse and co-founder Christian Larsen alleging failure to register XRP as security before offering around $1.3 billion worth of tokens.

According to the order from the U.S. Court for the Southern District of New York, Ripple first sold around $728.9 million worth of XRP directly to institutional buyers, hedge funds and other parties. These "institutional sales" constituted the unregistered offer and sale of investment contracts in violation of federal securities law, the order said, as it found investors would have purchased XRP with the expectation that they would profit from Ripple's work.

Ripple used the funds it received from institutional sales to "promote and increase the value of XRP by developing uses for XRP and protecting the XRP trading market," the order said.

The SEC’s motion for summary judgment was granted by the court as it applies to the institutional sale, and otherwise denied.

The "programmatic sales" of XRP through exchanges and algorithms did not qualify as the sale of securities because the SEC cannot definitively say speculative investors had “a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”

"There is no evidence that a reasonable Programmatic Buyer, who was generally less sophisticated as an investor, shared similar “understandings and expectations” and could parse through the multiple documents and statements that the SEC highlights, which include statements (sometimes inconsistent) across many social media platforms and news sites from a variety of Ripple speakers (with different levels of authority) over an extended eight-year period," the order said.

Larsen and Garlinghouse's own sale of XRP falls into this category, the order said, along with other distributions. Ripple's motion for summary judgment in lieu of "programmatic sales," other distributions, and Larsen’s and Garlinghouse’s sales, was granted.

Another motion by the SEC for summary judgment on an "aiding and abetting claim" against the two executives was denied as the court deemed it "is not clear whether Larsen and Garlinghouse knew or recklessly disregarded that securities laws, rather than laws under other regulatory regimes, applied to XRP."

The price of on the news.

"We said in Dec. 2020 that we were on the right side of the law, and will be on the right side of history. Thankful to everyone who helped us get to today’s decision – one that is for all crypto innovation in the U.S. More to come," Garlinghouse following the order.

UPDATE (July 13, 16:44 UTC): Adds details from the order throughout article.

Edited by Aoyon Ashraf.