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  • J Huang and S Pettigrove

Ripple case nears high tide

The SEC and Ripple Labs, Inc. (Ripple) have filed their reply submissions in the hotly anticipated SEC action over whether the XRP token offering was an unregistered securities offering.

The SEC first filed proceedings against Ripple in 2020. The SEC claims that Ripple sold over USD$1.38 billion in XRP over a six year period to fund Ripple's operations, which it alleges was an unregistered securities offering.

The suit is premised on the SEC's position that the cryptographic token XRP is a security. If this is correct, then Ripple would have evaded the requirement to provide investors with material information that other issuers are required to provide - the SEC say this benefited Ripple's founders to the tune of over $600 million in personal profits.

The law suit has evolved into a tug of war between the SEC and Ripple. Previously, the SEC successfully applied for the court to order Ripple to produce over 1 million Slack messages. The SEC believed the messages contain vital company communications which may assist them in determining whether Ripple sold unregistered securities.

Ripple fought back and claimed it had been unfairly singled out. It sought and was granted access to the SEC's internal records, in hopes of finding "evidence the regulator defined XRP as being similar to Bitcoin and Ether."

Ripple's reply submissions filed last week advanced the following key arguments in an attempt to refute SEC's claim that XRP is a security:

  1. XRP does not constitute an investment contract. Ripple argues the Howey test, which is the established principle to determine whether something is a security, requires the "essential ingredients" of an investment contract. The fact that "XRP grants no post-sale rights to recipients as against" Ripple, and XRP "imposes no post-sale obligation" on Ripple "to act for the benefits of those recipients", means there is no investment contract involved in the offer and sale of Ripple.

  2. No invesment of money. The Howey test requires an "investment of money" for XRP to constitute a security. Ripple points out that many XRP transactions did not involve an exchange of money, including the 500 million XRP which Ripple gave away to early adopters and developers. Further, even in transactions that did involve an exchange of money, Ripple argues there should be a difference between "payment" and "investment" of money.

  3. Lack of common enterprise. Ripple says the SEC has no factual support for any legally cognizable common-enterprise claim, which is another element required by Howey. As Howey explained, the common enterprise must have "all the elements of a profit-seeking business venture" in which "investors provide the capital and share in the earnings and profits; the promoters manage, control and operate the enterprise". Ripple argues that a common enterprise requires an ongoing relationship between the promoter and the investor; without that, there is nothing that can fairly be called an “enterprise” in which the investor holds a share.

  4. XRP holders do not reasonably expect profits from Ripple's efforts. Ripple argues there can be no reasonable expectation of profits from its efforts without some obligation by it to undertake efforts in the first place. For an asset sale to be a security, the purchaser must be buying, “in addition” to the asset, a commitment from the promoter to take actions to return a profit to the purchaser.

In its reply submissions, the SEC relies on a substantial body of case law to support its argument that the XRP token is security. However, there remains relatively limited precedent which directly addresses the question of whether cryptocurrencies are securities. The Ripple case is the first major action before a US Court which will consider this question.

A decision on the parties' respective summary judgment applications is expected next year. The Court may give summary judgment in favour of one party or another or order the matter to proceed to a jury trial. That outcome will be closely watched by regulators and the crypto-asset industry and will likely become a ground-breaking precedent with significant ripple effects in the United States and beyond.


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