The United States Securities and Exchange Commission (SEC) has filed its much-awaited arguments in its appeal against Ripple’s legal victory.
In its opening brief submitted to the Court of Appeals for the Second Circuit on January 15, the SEC argued that a New York District Court was wrong to declare that Ripple’s programmatic sales on digital exchanges were not securities.
The regulator also disputed the lower court’s decision regarding Ripple’s XRP-related non-cash transactions, which were also deemed non-securities.
SEC Faults District Court’s XRP Programmatic Sales Ruling
Recall that U.S. District Judge Analisa Torres held in July 2023 that Ripple did not violate federal securities laws through its programmatic sales of XRP. This held as retail investors did not expect profit based on the company’s efforts.
The judge cited affidavits from 3,000 XRP holders, who claimed they knew nothing about Ripple when they purchased the coin.
In its opening brief, the SEC emphasized that Judge Torres erred in this reasoning. It contended that Ripple led retail investors to expect profit from their XRP investments through its public marketing campaign. According to the SEC, this campaign glorified the company’s efforts to increase XRP’s price.
Additionally, the SEC faulted the district court’s position that required investors to know they were purchasing XRP from Ripple to expect profit based on the company’s efforts. The regulator argued that this requirement is unnecessary, asserting an issuer can lead investors to expect profit via indirect sales.
Furthermore, the SEC opines that this requirement undermines the Federal Securities Act established to protect investors.
“The undisputed facts demonstrate that retail investors expected profits based on Ripple’s efforts regardless of whether they knew that they were purchasing from Ripple or its affiliates,” the SEC remarked.
Consequently, the SEC rebuked the district court’s distinction of what retail and institutional investors were led to expect.
SEC Appeals Ruling Relating to Ripple Other Distributions of XRP
Furthermore, the securities regulator poked holes in the district court’s decision on Ripple’s other distribution of XRP for non-cash considerations. Some of these transactions include charitable donations and grants Ripple made in the form of XRP.
According to the SEC, the district court erred when it declared that these transactions were not investment contracts because they did not involve an investment of money- the first prong of the longstanding securities test, Howey.
It argued that these transactions are equivalent to monetary payments. Hence, the lower court should have labeled them as securities.
Attorney Hogan Reacts
Expectedly, the SEC’s opening appeal brief elicited reactions from top legal experts, with Attorney Jeremy Hogan sharing his views.
He noted that the SEC is only appealing the decision relating to Ripple’s XRP sales to retail investors while neglecting that investors were unharmed. Hogan characterized the filing as ‘lackluster,’ saying the SEC used half of the brief to highlight the district court’s decision.
“It’s kind of like trying to talk a girl into going out with you and spending half your time telling her back the reasons she said “no” previously,” Attorney Hogan remarked.
According to Hogan, the SEC has still not provided evidence that retail investors expected profit based on Ripple’s efforts.
Potential Outcome of SEC Appeal
The top lawyer predicted that the Second Circuit would not rule on the case, suggesting that the appeal would be dismissed. As previously reported, Ripple CLO Stuart Alderoty shared a similar sentiment, predicting that the next administration would abandon the appeal.
However, if the next administration chooses to continue with the appeal and the Second Circuit sides with the SEC, it will remand the case to Judge Torres. She will decide on the next action, including whether to apply another Howey factor to the facts of the case.
In the meantime, XRP remains unfazed as it continues to reach new heights. Yesterday, the coin surpassed the $3 price mark for the first time since 2018. It is currently trading at $3.11, up 11.25% over the past 24 hours and 34.99% in the past week.
Yet, XRP is currently down 18.76% from its all-time high of $3.84, registered on January 4, 2018.
