Gary DeWaal, Financial Markets and Funds senior counsel, spoke with several media outlets following the very significant recent ruling in the Securities and Exchange Commission's (SEC) enforcement action against Ripple Labs Inc. US District Judge Analisa Torres ruled that Ripple's XRP sales on public cryptocurrency exchanges were not offers of investment contracts (and thus not securities) under the law, because purchasers did not have a reasonable expectation of profit tied to Ripple's efforts. Those sales were "blind bid/ask transactions," she said, in which buyers "could not have known if their payments of money went to Ripple, or any other seller of XRP." Judge Torres additionally ruled for Ripple in connection with the distribution of XRP to employees and certain third-party vendors, saying that such distributions also did not constitute investment contracts. It is noted, however, that while there will likely be an appeal, the SEC had a partial victory because Judge Torres also held that Ripple violated federal securities law by selling XRP directly to sophisticated investors.
In a Reuters article, Gary noted that the ruling is a "tremendous event for the industry." Elaborating for The Block, he stated, "This is a major victory for the industry and a major loss for the SEC because in fact by holding that the programmatic sales are not investment contracts, she is holding that secondary market transactions in crypto assets are not securities." This is despite a footnote written by the Judge that says her decision does not pertain to secondary market transactions.
Gary told Bloomberg Law that "The payoff is a ruling that should embolden other companies to continue opposing SEC attempts to regulate cryptocurrency as a security. . . It's a really big chip in the SEC arsenal. As a matter of law, a court has held that crypto assets traded on a platform are not investment contracts."
For Law360, he shared that the SEC "got the treatment it wanted, but not the result." "I actually think that what happened here is exactly what the SEC wanted and has always been saying, which is [that] it's all about Howey. But in fact, when Howey was really applied exactly like Howey, the SEC didn't necessarily get the result it wanted." Gary added that is where this ruling is a game changer for other exchanges currently being sued by the SEC for purportedly listing security tokens. "Right now their enforcement actions against platforms [are] really in jeopardy because there's now the first real case law about secondary market transactions has gone against them."
Media coverage includes the following, among others:
"Ripple Labs notches landmark win in SEC case over XRP cryptocurrency," Reuters, July 13, 2023
"SEC faces 'wake up call' after Ripple ruling, though appeal likely," The Block, July 13, 2023
"SEC, Ripple Likely To Head To 2nd Circ. After Token Ruling," Law360, July 14, 2023
"Ripple Ruling Means More Attorney Work in SEC Crypto Fights," Bloomberg Law, July 17, 2023
"The Brief – Top News of the Day From Bloomberg Law," Bloomberg Law, July 17, 2023
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