Ripple has been partially backed by a US federal court in a Securities and Exchange Commission lawsuit. The SEC had claimed that the San Francisco blockchain developer, with its XRP coin, issued unauthorized securities.
After answering both sides’ summary judgement requests, the court ruled, that although Ripple’s institutional XRP sales were found to be an unregistered security offering, Ripple’s programmatic XRP sales were not.
The Court notes in its decision that “having considered the economic reality of the Programmatic Sales, the Court concludes that the undisputed record does not establish the third Howey prong.”
“Since 2017, Ripple’s Programmatic Sales represented less than 1% of the global XRP trading volume. Therefore, the vast majority of individuals who purchased XRP from digital asset exchanges did not invest their money in Ripple at all. An Institutional Buyer knowingly purchased XRP directly from Ripple pursuant to a contract, but the economic reality is that a Programmatic Buyer stood in the same shoes as a secondary market purchaser who did not know to whom or what it was paying its money.”
“Therefore, having considered the economic reality and totality of circumstances, the Court concludes that Ripple’s Programmatic Sales of XRP did not constitute the offer and sale of investment contracts.”
Summary judgment is the result of a legal fight that lasted three years and may set precedents for other token classification lawsuits.
Judge Grants Part of SEC Motion Concerning $728 Million in Institutional Sales The SEC calculated Ripple XRP’s total sales to be $1.4 billion at the time the SEC filed its lawsuit against Ripple in December 2020.
Different institutions sell different products
“The court ruled,” “reasonable investors…in the position of the Institutional Buyers, would have purchased XRP with the expectation that they would derive profits from Ripple’s efforts.”
“XRP, as a digital token, is not in and of itself a “Contracts of transaction[,] The scheme” that embodies the Howey requirements of an investment contract”The court decided.
“Rather, the Court examines the totality of circumstances surrounding Defendants’ different transactions and schemes involving the sale and distribution of XRP,” Addition of the file.
Ripple has been ruled to be in violation of the law “essential ingredient” Ripple’s defense in which it argues that an actual contract is required to consider a contract for investment.
As follows, in evaluating institutional sales the court used the Howey Test with its three prongs:
Howey Prong 1
“The first prong of Howey examines whether an ‘investment of money’ was part of the relevant transaction.”
“Defendants do not dispute that there was a payment of money; the Court finds, therefore, that this element has been established.”
Howey prong 2.
“The second prong of Howey, the existence of a ‘common enterprise,’ 328 U.S. at 301, may be demonstrated through a showing of “Horizontal commonality”
“The Court determines that there exists a joint enterprise. This is because, as shown in the records, the assets of Institutional Buyers are tied to both the enterprise’s success and to that of other Institutional Buyers.”
Howey prong 3.
“The third prong of Howey examines whether the economic reality surrounding Ripple’s Institutional Sales led the Institutional Buyers to have ‘a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.'”
“According to the Court, a reasonable investor in the Institutional Buyers position, based upon the overall circumstances of the case, would likely have purchased XRP expecting that Ripple would be able to generate profits.”
“Each time Defendants sold or offered XRP, they were committing to a contractual relationship.” the judge wrote in Thursday’s summary judgment.
“In light of the above, SEC’s summary judgment motion is granted in respect to Institutional Sales. Its other motions are denied. The motion of the defendants for summary judgement is granted as to Programmatic Sales and Other Distributions as well as Larsen’s and Garlinghouse’s Sales and denied as to Institutional Sales.”
Brad Garlinghouse and Chris Larsen
In a lengthy analysis, the judge concluded that “SEC doesn’t need to prove that [Ripple co-founder Chris] Larsen [CEO Brad] Garlinghouse was aware of Ripple’s illegal transactions and schemes.”
“A reasonable jury could, therefore, find, on the basis of the facts disputed in the records, that Larsen or Garlinghouse were not aware or did not disregard Ripple’s Section 5 violation.”
In response, Garlinghouse tweeted, “”We were right on the side of law and history.”
Hinman docs and their importance
Ripple Labs is accused by the SEC of illegally raising $1.3 billion from investors in December 2020.
In September 2022 after a lengthy legal dispute, Ripple and the SEC agreed that a judge could issue a summary verdict based solely on the submitted evidence.
Part of the Ripple team’s strategy involved gaining access to what are now known as the Hinman documents — internal SEC drafts and emails relating to a former director’s speech more than four years ago.
William Hinman said in his 2018 speech that he did not consider ether as a financial instrument. He also suggested that tokens may initially be viewed as securities, but could evolve over time into something different.
Hinman was a lawyer at Simpson Thacher before he joined the SEC. The firm is a member of the Enterprise Ethereum Alliance which promotes the use commercially. Hinman returned to Simpson Thatcher after leaving the SEC.
Ripple’s defence argued that emails show a potential conflict of interests, and suggested the regulator could be picking which projects it targets. Hinman never expressed an official SEC position, but his comments were not a reflection of the SEC’s. In June, the emails were released.
Uncertain is the real impact that Hinman’s documents had on Ripple. The SEC’s decision comes after it classified nine other cryptos as securities, in an enforcement case against a former Coinbase worker for insider-trading, and after it listed nearly two dozen tokens throughout its Coinbase and Binance lawsuits.
Although none of the token issuers named in the complaints is listed as a defendant, members of the industry speculated that SEC could choose to file charges at a future date against the issuers.
However, after the Ripple ruling, there may be a change.
Since the SEC filed Ripple’s lawsuit, it has also sued other firms, including Justin Sun and the Tron Network, Kraken and Nexo, as well as BlockFi. These three firms chose to settle.
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