Michaela Alvez
The U.S. Securities and Exchange Commission (SEC) has officially appealed a July 2023 court ruling that partially favored Ripple Labs, continuing its legal fight with the tech company.
On Wednesday, the SEC submitted an opening brief to the U.S. Court of Appeals for the 2nd Circuit, aiming to reverse a previous ruling that determined Ripple’s digital currency, XRP, should not be classified as a security when sold to retail investors.
In its filing, the SEC referred to the Howey Test, asserting that Ripple’s marketing activities led investors to expect profits, thereby classifying XRP as an investment contract.
The Howey Test is a legal framework established in the 1946 SEC v. W.J. Howey Co. case, which the SEC uses to determine whether an asset should be classified as a security. The test looks at whether there was an investment of money in a common enterprise with the expectation of profits, and if those profits are to be derived from the efforts of others.
The SEC initially filed its appeal in October 2024 after a district court partially sided with Ripple in July 2023. However, Wednesday’s submission of the opening brief marks a significant milestone in the appellate process.
In the July 2023 decision, U.S. District Court Judge Analisa Torres made a key distinction in the case, ruling that while XRP sales on exchanges did not qualify as securities, transactions involving institutional investors were classified as securities. After the ruling, a final judgment in August 2024 required Ripple to pay a $125 million civil penalty for its institutional sales of XRP.
In the brief filed by defense attorney James Filan, the SEC argues that both institutional and retail sales of XRP qualify as investment contracts under the Howey Test.
The regulator emphasized that Ripple’s sales of XRP, amounting to more than $2 billion, were unregistered investment contracts that violated federal securities laws.
Additionally, the SEC challenges the district court’s determination that XRP given to employees and business partners did not meet the “investment of money” criterion under the Howey Test. The regulator asserts that receiving valuable services in exchange for XRP is economically comparable to a monetary transaction, thereby fulfilling the requirement.
Should the SEC prevail in its appeal, the case would be sent back to the district court, where a judge would determine the next steps in addressing Ripple’s actions. This would include evaluating whether Ripple’s executives played a role in violating securities laws through the sale of XRP to investors. Additionally, the SEC is seeking further “remedies,” which could involve enhanced penalties.
In response to the SEC’s appeal, Ripple’s Chief Legal Officer Stuart Alderoty took to X to air out his grievances. “As expected, the SEC’s appeal brief is a rehash of already failed arguments –and likely to be abandoned by the next administration,” he wrote.
Ripple CEO Brad Garlinghouse also shared his thoughts on the matter, calling the SEC’s move “insanity”. “Doing the same thing over and over and expecting different results. Gensler’s SEC really took this to heart,” Garlinghouse added.
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Michaela has no crypto positions and does not hold any crypto assets. This article is provided for informational purposes only and should not be construed as financial advice. The Shib Magazine and The Shib Daily are the official media and publications of the Shiba Inu cryptocurrency project. Readers are encouraged to conduct their own research and consult with a qualified financial adviser before making any investment decisions.
