- The U.S. Securities and Exchange Commission has formalized its appeal of the 2023 Ripple case in the Second Circuit Court
- The SEC contends that Ripple’s public promotions led all investors, retail and institutional alike, to reasonably expect profits from Ripple’s efforts
- The agency also disputes the lower court’s decision that Ripple’s XRP transactions for non-cash consideration do not meet the legal definition of an investment contract
The U.S. Securities and Exchange Commission (SEC) has escalated its legal battle with Ripple Labs to the Second Circuit Court of Appeals, arguing that Ripple’s public marketing and ecosystem development created an expectation of profit among XRP buyers. This contradicts the district court’s finding that retail sales did not qualify as investment contracts, with the SEC further challenging the ruling on non-cash transactions, asserting that these also involve investment contracts as defined under federal securities law. The SEC filed its intention to appeal last year but has crystalised its arguments in this filing.
SEC Leans on Howey Again
The SEC initiated legal action against Ripple Labs in 2020, alleging that the company violated federal securities laws by offering and selling XRP without proper registration. In 2023, the district court issued a mixed ruling; it upheld the SEC’s claims regarding institutional XRP sales but found Ripple’s retail sales and transactions for non-cash consideration exempt from registration under the Securities Act.
The SEC contends that the district court erred in its interpretation of the Howey Test’s “expectation of profit” criteria. According to the SEC’s appellate brief, Ripple’s public statements—across platforms like YouTube, social media, and investor reports—painted XRP as an investment tied to Ripple’s success. One notable claim from the SEC reads: “Ripple publicly promised that its efforts would create a rising tide lifting XRP’s price, leading all buyers to expect profits.”
Non-cash Considerations
The SEC criticizes the district court’s emphasis on the “blind bid/ask” nature of retail transactions, arguing that such mechanics do not negate the promotional narratives which led retail investors to believe in Ripple’s managerial role in enhancing XRP’s value. The agency insists that Ripple’s multi-channel marketing campaign created a uniform expectation among institutional and retail buyers alike.
The SEC also disputes the court’s conclusion that XRP distributed for non-cash consideration, such as to employees or business partners, did not constitute securities transactions. It highlights precedents where non-cash exchanges, including services, have been deemed valid forms of “investment of money” under securities laws.
Crucial Case Enters Next Phase
This appellate case could set a critical precedent for how courts apply securities law to cryptocurrencies, hence why it has garnered so much publicity since it was filed. If the SEC prevails, Ripple could face further regulatory restrictions and financial penalties, while the decision could also strengthen the SEC’s broader crackdown on unregistered crypto offerings. Ripple maintains that XRP is a utility token, not an investment, a defense central to its legal strategy.
By taking the dispute to the Second Circuit, the SEC seeks to solidify its authority over crypto asset sales and emphasize the importance of investor protections enshrined in securities laws.
