Investor Advocacy Group Backs SEC in Ripple Appeal

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  • An investor advocacy group has filed an amicus curiae brief supporting the SEC in its ongoing appeal in the Ripple Labs case
  • In its filing, Better Markets emphasized investor protection and argued the district court improperly excluded retail XRP sales from securities regulation
  • The filing warns that the ruling risks undermining securities laws, leaving retail investors unprotected in volatile crypto markets

Better Markets, a nonprofit financial watchdog, has filed an amicus curiae brief supporting the SEC in its appeal against Ripple Labs. The case, which originated in December 2020, centers on whether Ripple’s XRP token constitutes a security, and Better Markets has strongly criticized the district court’s earlier decision in Ripple’s favor. The organisation argues that the ruling, which excluded XRP sales on secondary platforms from securities law oversight, leaves retail investors vulnerable to fraud.

Ruling Created “Two-tier System”

The SEC’s lawsuit against Ripple began in 2020, accusing the company of raising $1.3 billion through unregistered securities sales via XRP tokens. Under the Howey Test, the SEC maintains that XRP meets the definition of an investment contract. While the district court ruled that institutional sales of XRP qualified as securities, it controversially excluded programmatic sales to retail investors, arguing that they lacked direct ties to Ripple’s efforts.

Better Markets used the opportunity of an amicus brief, which anyone can file, to challenge this distinction, arguing that the nature of the investment—rather than the purchase channel—should determine its status, stating, “The court’s decision deprives retail investors of critical protections under the securities laws in an investment arena rife with fraud and abuse.”

The nonprofit also argues that the decision creates a “two-tier system,” safeguarding institutional investors while neglecting retail participants who purchased XRP through secondary markets. It has urged the U.S. Court of Appeals for the Second Circuit to reverse the lower court’s findings, emphasizing the potentially devastating consequences for everyday investors and the broader financial system.

Broader Implications for Crypto Regulation

Better Markets warns that the district court’s narrow interpretation of securities laws could embolden other cryptocurrency projects to exploit similar loopholes, highlighting how the ruling favors institutional players over smaller retail investors, the latter of whom are often more exposed to risky and misleading practices.

Ripple’s use of aggressive marketing and promises of profit tied to the company’s efforts, the brief argues, aligns with the traditional understanding of an investment contract, with the organisation warning, “The harm posed by the court’s decision is likely to extend well beyond the realm of crypto.” It says that the loophole could undermine investor confidence and lead to increased fraud in emerging financial markets.

Having celebrated the initial victory in 2023, the crypto world is waiting to see what happens with this high-stakes appeal, which could establish a precedent affecting how cryptocurrencies are regulated in the US.

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