TLDR
The SEC has filed an appeal seeking to overturn a previous ruling that distinguished between institutional and retail XRP sales, arguing all XRP sales should be classified as securities
The appeal challenges Judge Torres’ July 2023 ruling which found XRP was not a security when sold to retail investors but was a security in institutional sales
The SEC argues that Ripple’s marketing efforts led all investors to expect profits, making the institutional/retail distinction invalid under the Howey test
The case coincides with an anticipated leadership change at the SEC, with Gary Gensler stepping down and potential policy reforms under the Trump administration
If successful, the case would return to district court for further action, potentially resulting in additional penalties against Ripple
The U.S. Securities and Exchange Commission (SEC) filed an opening brief on Wednesday in its appeal against a previous court ruling that differentiated between institutional and retail sales of XRP cryptocurrency.
The appeal targets the July 2023 decision by Judge Analisa Torres of the U.S. District Court, which ruled that XRP was not a security when sold to retail investors but qualified as a security in institutional sales. This ruling led to a $125 million civil penalty against Ripple for institutional sales.
In its appeal to the U.S. Court of Appeals for the 2nd Circuit, the SEC argues that both institutional and retail sales of XRP meet the criteria for investment contracts under the Howey test, the standard used to determine what qualifies as a security.
The SEC points to Ripple’s marketing efforts as a key factor in its argument. According to the regulator, Ripple conducted a public marketing campaign aimed at increasing XRP’s price, which reached all investors regardless of their classification.
The brief challenges the district court’s distinction between different types of investors. The SEC maintains that separating “sophisticated” institutional investors from “less sophisticated” retail investors contradicts the objective standard set by the Howey test.
The regulator emphasizes that the economic realities of the transactions and investor expectations should be the focus, rather than the specific identity of the seller or buyer. According to the SEC’s brief, all XRP investors reasonably expected profits based on Ripple’s actions.
The appeal also contests the district court’s finding regarding XRP distributed to employees and business partners. The SEC argues that receiving valuable services is economically equivalent to monetary payment, meeting the Howey test’s “investment of money” requirement.
Over the course of its XRP sales, Ripple raised more than $2 billion. The SEC maintains these sales constituted unregistered investment contracts and violated federal securities laws.
If the SEC succeeds in its appeal, the case would return to the district court for further proceedings. This could result in additional actions against Ripple and potential examination of whether its executives aided in securities law violations during XRP sales.
The timing of this appeal coincides with anticipated changes in SEC leadership. Gary Gensler is scheduled to step down as SEC Chair, with new leadership expected under the incoming Trump administration.
Industry observers note that enforcement actions initiated under Gensler’s leadership could face dismissal or settlement under new leadership. SEC commissioners Hester Peirce and Mark Uyeda are preparing to reform the agency’s regulations, with a focus on cryptocurrency asset classifications.
Ripple’s response to the appeal has been dismissive. CEO Brad Garlinghouse characterized the SEC’s arguments as repetitive, while Chief Legal Officer Stuart Alderoty suggested the appeal might be abandoned by the next administration.
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… https://t.co/3ZxO64Fs8C
— Stuart Alderoty (@s_alderoty) January 16, 2025
Pro-crypto lawyer Jeremy Hogan highlighted perceived weaknesses in the SEC’s brief, noting a lack of evidence showing retail XRP purchasers were aware of Ripple’s promises to them.
The appeals process could extend over several months. Ripple will have the opportunity to submit written counter-arguments, and the court may hold oral arguments before reaching a decision.
Ripple has also filed its own cross-appeal of the partial SEC victory in the lower court, challenging the $125 million civil penalty ordered by Judge Torres.
Despite the SEC’s appeal filing, XRP’s market performance has remained strong, with the cryptocurrency showing a 10% increase over 24 hours amid broader market gains.
The case continues to draw attention from the cryptocurrency industry as it could set important precedents for how digital assets are classified and regulated in the United States.
The post SEC Files Appeal in Ripple Case, Challenges XRP Classification Ruling appeared first on Blockonomi.
