- The judge overseeing the SEC’s case against Terraform Labs rejected the company’s claims that the recent ruling in the SEC vs. Ripple case works in their favor
- Judge Rakoff’s decision dismissed the distinction made in the Ripple case between public and institutional sales of the token
- The SEC accuses Terraform Labs and Kwon of offering and selling unregistered securities
The judge overseeing the SEC’s case against Terraform Labs has rejected the company’s claims that the recent ruling in the SEC vs Ripple case works in their favor. Judge Jed Rakoff not only denied that Terraform Labs could use the ruling to their advantage but even went so far as to criticize the ruling from Judge Torres in that case, claiming that her interpretation of securities laws was wrong. He has added his voice to calls from those with huge experience in the sector who believe that the ruling will be overturned on appeal.
Judge Rakoff Rejected Ripple Ruling
Judge Rakoff’s decision on Monday rejected the distinction made in the Ripple case between public and institutional sales of the token, which Judge Torres determined meant that Ripple’s XRP token qualified as a security when sold directly to institutional investors, but not to the general public on exchanges:
The court declines to draw a distinction between these coins based on their manner of sale, such that coins sold directly to institutional investors are considered securities and those sold through secondary market transactions to retail investors are not. In doing so, the court rejects the approach recently adopted by another judge of this district in a similar case.
The SEC had argued that the application of the Howey test, a legal framework used to determine whether an investment qualifies as a security, warranted classifying XRP as a security. The Howey test requires an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
Judge Torres applied the Howey test in the Ripple case, deeming institutional sales of the token as securities due to their speculative nature and potential for profits. However, she excluded sales to the general public, citing a lack of evidence indicating that these purchasers expected to share in the company’s profits, especially considering many of these transactions were conducted through trading algorithms on exchanges.
Terra Tokens Were Sold to Both Retail and Institutional Buyers
The SEC’s case against Terraform Labs and Kwon, filed in February, alleges that they offered and sold unregistered securities as part of a fraudulent scheme that caused at least $40 billion worth of market value to vanish. Kwon, who had previously evaded prosecution in South Korea, was arrested in Montenegro in March for traveling on a false passport and is also facing US criminal charges.
Judge Rakoff asserted that the SEC’s allegations applied to both institutional and retail investors in the Terraform case. The defendants were accused of promoting the tokens’ profitability and falsely claiming that the proceeds from token sales would be reinvested in the Terraform blockchain to generate further profits.
The uncertainty created by Judge Rakoff’s ruling and the ongoing debate over the classification of digital assets as securities may bolster the argument for new legislation to address the complexities of cryptocurrency regulation. As the case progresses, the crypto industry, regulators, and lawmakers will closely watch its implications for future legal decisions and regulatory frameworks in the evolving world of cryptocurrencies.
