SEC’s Attempt to Appeal Ripple Case Loss Rejected
[TL; DR]
Recently District Judge Analisa Torres rejected the SEC’s attempt to appeal against the Ripple case ruling.
The SEC argued that the court ruling may affect the other related cases.
The SEC vs. Ripple full trial will commence in April 2024.
Introduction
The U.S. Securities and Exchange Commission (SEC) against Ripple Labs (Ripple) case has become the most protracted SEC lawsuit in the history of cryptocurrency and the blockchain. It has dragged on since December 2020 and is likely to go on until 2024.
This post covers the background of the SEC vs. Ripple lawsuit as well as the reasons for the SEC’s appeal against its loss.
SEC Against Ripple Lawsuit
Recently, the District Judge Analisa Torres rejected the U.S. Securities and Exchange Commission’s move to appeal its loss against Ripple Labs, the crypto company that owns Ripple (XRP). Judge Analisa Torres ruled that the SEC has failed to prove that there were substantial grounds of differences or compelling and controlling questions of law.
Basically, the dismissal of the SEC vs. Ripple appeal is another big blow to the U.S. Securities and Exchange Commission and another big win for Ripple as well as the entire crypto sector. According to the order, the SEC was set to appeal against Judge Torres’ findings on XRP programmatic sales and other distributions, where Ripple used the cryptocurrency to make several payments for services offered.
Also, the judge contended that the SEC appeal would not help in advancing the case towards a conclusion. The order read, “The SEC’s motion for certification of interlocutory appeal is denied.”
However, District Judge Torres’ order against the SEC’s appeal does not mean that Ripple has won the case. According to the U.S crypto law, the SEC against Ripple case is likely to be concluded in 2024 after additional court sessions. In fact Judge Torres set 23 April 2024 as the date for the final trial.
Still, the SEC will have another chance to appeal against the overall ruling should it lose against Ripple.
Read also: Why People think SEC is Indecisive on Which Crypto Assets are Securities
Background on the Ripple Battle
In December 2020, the SEC filed a lawsuit against Ripple, alleging that it conducted a sale of unregistered security, XRP. According to the lawsuit, Ripple Labs violated Sections 5(a) and 5(c) of the Securities Act of 1933 by selling Ripple crypto which it deemed to be a security that should have been registered before sold to investors and the public.
That lawsuit significantly affected the value of XRP coin which was one of the top crypto assets at that time. Its market capitalization which was around $27 billion dropped to about $16 billion. Nevertheless, immediately after the SEC lawsuit Ripple announced that it would fight back.
The dispute was about whether or not Ripple (XRP) should be considered to be an investment contract. Nevertheless, there is no definition of investment contract in the federal securities regulations. Instead, the court uses the Howey Test criteria, established in 1946 to assess whether an investment instrument is a security or not.
The SEC has argued that the people who purchased XRP expected to get a return from that. It claims that the returns which the investors would get depended on the promotional activities of Ripple Labs.
It further maintained that Ripple advertised that the investors could sell the crypto asset on secondary markets to generate profit. Based on such grounds, the SEC deem XRP to be a security.
Court’s Ruling
On 13 July 2023, U.S. District Judge Analisa Torres announced a ruling against Ripple Labs and its two senior utives Christian A. Larsen (Ripple’s co-founder, former CEO, and current utive chairman) and Bradley Garlinghouse (Ripple’s current CEO). The court said that whether or not XRP is a crypto security depends on how the investors have acquired it.
It declared that Programmatic Sales of XRP and other distributions do not make Ripple crypto a security since they do not meet the Howey Test criteria. With the programmatic sale of XRP Ripple Labs did not know the people who were purchasing its cryptocurrency. This is because they were sold to the public through exchanges. On the other hand, the XRP buyers had no full knowledge of the firm or individual selling it.
In the case of Ripple, the other sale referred to the XRP coins that were given to the employees for their services. According to the court ruling, such payments do not make XRP a security because the employees did not pay any money to acquire them. As such, they do not constitute an investment contract.
Nevertheless, the sale of XRP to institutional investors makes XRP a security. This is because the investors paid for the Ripple crypto using various fiat currencies which satisfies the Howey Test investment money criteria. Also, the fortunes of the individual investors were tied to the success of Ripple.
SEC’s Decision to Appeal the Court Ruling
The SEC had its reasons to appeal to the SEC vs. Ripple battle court ruling. First, the SEC said that the matter required immediate attention because it affects the outcomes of other cases, including the ones against Coinbase Global Inc. and Binance Holdings Ltd.
It also pointed out that there was inconsistency on the court’s side on what constitutes a crypto security. That was because Jed Rakoff, a Manhattan federal judge’s view contrasts that of Torres, reflected in the SEC against Terraform Labs case.
The SEC’s other argument is that the Ripple case court ruling creates an “artificial distinction” between retail investors and institutional ones. In other words, the ruling creates different standards for institutional investors and retail investors. As a result, it argues that the ruling “improperly transforms Howey’s reasonable investor inquiry into a subjective one, and turns on its head the reasoning underlying Howey and other cases.”
According to the SEC, as a result of the above difference it becomes difficult to reconcile with the fundamental provisions of the securities law. Regarding this, the SEC said “Finally, the underlying logic of the Ripple ruling is divorced from the basic principles behind Howey and the federal securities laws more broadly.”
Related news: Catalysts that Could Propel Ripple (XRP) to New heights in 2023
Ripple Vs. SEC Legal Dispute Timeline
Many crypto experts and analysts believe that Ripple has not yet won the case since there will be other court sessions in April 2024. Preston Byrne, an entrepreneur and a business partner at Brown Rudnick, said that the SEC is still reviewing the case and it still stands a chance to win against Ripple Labs.
Preston Byrne said “The Ripple summary judgment is obviously not the last word on the issue. Even if the case ends like this Ripple still has “got multi-billions of dollars in institutional sales that they’re on the hook for.”
The SEC vs. Ripple battle will come to an end in April 2024 when the court is expected to give its final verdict. In the meantime, the SEC is still reviewing its position and may come up with other strong arguments to win the case.
According to some analysts like Yassin Mobarak, an entrepreneur, the SEC may withdraw its lawsuit against Ripple before the final court session. He recently said, “They will now move to end this case as soon as possible so that they can appeal to the 2nd circuit and continue to sustain this cloud of uncertainty in the whole industry. Litigation, by itself, regardless of the outcome, is the weapon.”
Conclusion
The U.S. Securities and Exchange Commission (SEC) has lost its attempt to appeal against the court verdict on the SEC vs. Ripple case. The District Judge Analisa Torres ruled that the SEC has failed to prove substantial grounds of differences. In the meantime, Judge Torres set 23 April 2024 as the date for the commencement of the SEC vs. Ripple case trial.
