The US SEC files an appeal notice to challenge Ripple’s victory, eyeing XRP transactions scope under securities law.
The Securities and Exchange Commission (SEC) filed the appeal notice to challenge the July 2023 ruling against Ripple Labs. The securities watchdog challenged the decision by Judge Analisa Torres delivering a partial victory for the defendant.
The court filing by the Wall Street watchdog adds a twist to the long-running lawsuit that began in December 2020. The suit alleges the fintech company alongside chief executive Bradley Garlinhouse and Christian Larsen executed unregistered securities offerings. The regulator indicates selling XRP tokens contravened Section 5 of the Securities Act (1933).
SEC Challenges XRP Ruling
The Wednesday filing by the Gary Gensler-led regulator seeks to reverse the judgment delivered by the US District Judge Torres. However, the news of the official filing with the Second Circuit Court of Appeals saw the XRP tumble shedding nearly 10% in value to change slightly above $0.54 per CoinGecko data.
Commenting on the appeal notice, an SEC executive believes the district court decision conflicts with the Supreme Court precedent and provisions under the securities laws.
The complaint against Ripple emerged when the SEC leveled a $1.3 billion lawsuit in 2020 claiming the fintech company raised funds for investors by offering XRP it considered unregistered securities. Last year, Judge Torres granted the SEC’s motion that Ripple’s institutional sales constitute securities though denied on other points.
Conversely, the judge granted the motion by Ripple Labs to rule out programmatic XRP sales being securities. Additionally, the judge dismissed the aiding and abetting claims leveled against Garlinghouse and Larsen.
The SEC submits that the decision by the District Court conflicts with the fundamental principles of securities law. Particularly, the regulator challenges the exclusion of XRP sales on the crypto exchanges and distributions from the Howey Test.
The crypto industry interpreted the partial win by Ripple as a critical development despite the court holding that $728 million in institutional sales were unregistered securities sales. The regulator initially sought a $2 billion fine only for the New York court to direct Ripple to settle a mere $125 million.
https://Twitter.com/bgarlinghouse/status/1841597085264839113
Ripple Labs chief Garlinghouse responded via an X post urging a rational move by SEC and its chair Gensler would emerge if they move on from the prolonged case. The executive profiles the case as unable to protect the investors and asserts it only damages the SEC’s reputation and credibility.
SEC Strategy to Win Appeal
The regulator reinforces the Howey Test application being the legal standard in ascertaining transactions qualifying as investment contracts. As such, the SEC argues that the economic realities in XRP sales satisfy the Howey criteria.
Primarily, the SEC claims the XRP sales satisfy the investment of money requirement since investors utilized either fiat or crypto to acquire XRP. Besides, the regulator points to the existence of a common enterprise that facilitated the funds pooling and its utilization in developing and supporting the XRP system.
Lastly, the SEC claims profit expectations emerged as the investors bought XRP to derive gains from Ripple’s efforts. The SEC seeks to present a comprehensive legal argument to downplay the sale method alongside the buyers’ and sellers’ anonymity as grounds to exempt XRP transactions from the securities laws.
The SEC targets closing the perceived loophole capable of allowing companies to bypass the registration requirements and investor protections by leveraging crypto asset exchanges.
Regaining Broader Crypto Control
The successful appeal by the SEC would yield far-reaching implications for the crypto industry. Granting the motion would reinforce the SEC’s stance that digital tokens satisfy securities classification and, thus subject to federal laws.
A victory for the SEC in the appeal will usher in increased regulatory oversight and mandate crypto companies to reevaluate token distribution methods. It underscores the commitment by the Commission to enforce securities laws amid the evolving cryptocurrency space.
The case development is critical as the industry seeks to learn the interpretation of the securities law principles to modern-day crypto transactions.
The appeal will prolong the legal uncertainty for the digital asset industry as the community awaits clear regulations. The ruling will set a legal precedent to reshape the crypto regulatory landscape.
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