XRP Sales Under Scrutiny Again

The ongoing legal battle between Ripple Labs and the US Securities and Exchange Commission (SEC) has taken a new turn with the SEC’s latest appeal. 

On January 15, the SEC filed a motion challenging the district court’s ruling on Ripple’s sale of XRP to retail investors.

SEC Argues XRP Retail Sales Qualify as Investment Contracts

The SEC is appealing the district court’s ruling that XRP sales to retail investors did not qualify as investment contracts.

The court had distinguished retail buyers from institutional investors. It reasoned that retail buyers purchasing XRP from trading platforms did not have the same expectations of profit. 

The SEC, however, contends that this reasoning is flawed.

“The district court erroneously found that retail investors did not have that same expectation because they purchased XRP through crypto asset trading platforms and thus did not know if the seller was Ripple, a Ripple affiliate, or someone else,” SEC said.

The SEC’s legal argument is grounded in the Howey Test. It is a key Supreme Court decision in 1946 that defines an investment contract. According to the Howey Test, an investment contract exists when investors invest money in an enterprise with the expectation of profits primarily from the efforts of others.

The SEC said that Ripple’s consistent messaging across various platforms, including its website, YouTube, Reddit, and media interviews, demonstrated that all investors, retail or institutional, expected to profit from its actions.

The regulator also challenged the district court’s decision regarding Ripple’s sales of XRP in exchange for non-cash consideration, such as labor and services.

The SEC said that non-cash payments should be treated the same as cash investments under the Howey Test. Several courts have previously ruled that such arrangements satisfy the “investment of money” requirement for an investment contract.

The SEC argues that Ripple should have registered its investment contracts with the agency. SEC also urged the court to vacate the district court’s ruling and grant summary judgment in favor of the Commission. The regulator asserted that Ripple’s activities violated securities laws and harmed investors. 

Ripple’s legal chief, Stuart Alderoty, responded to the SEC appeal on X and said the lawsuit is just “noise.”

“As expected, the SEC’s appeal brief is a rehash of already failed arguments –and likely to be abandoned by the next administration. We’ll respond formally in due time. For now, know this: the SEC’s lawsuit is just noise. A new era of pro-innovation regulation is coming, and Ripple is thriving,” Alderoty said.

The SEC news did not affect the XRP token. In fact, XRP was up 7.8% over the last 24 hours and was trading at $3.07. It appears the market is anticipating a judgment in favor of Ripple.