Ripple didn’t win, but it definitely didn’t lose: Where the SEC case goes next

A federal judge has granted a partial summary judgment in favor of Ripple in its case against the SEC, but the case isn’t over yet. 

In a partial win for the company, the court ruled that while Ripple’s institutional sales of XRP constitute an unregistered securities offering, programmatic sales via exchanges do not. The judge did not address several other issues in the case, and it’s not the final verdict. 

US District Judge Analisa Torres wrote in Thursday’s filing that the court will schedule a trial to deal with the issues not answered in the summary judgment. 

What will be determined at trial 

At its heart, the ruling by Torres set the stage for what will or won’t be at issue if and when the case against Ripple goes to trial. 

In the summary judgment, the court ruled that “programmatic sales” — defined as sales from Ripple Labs to buyers on an exchange — are not securities. “Secondary sales” include sales from someone who is not Ripple Labs or an executive to buyers, either on an exchange or not. 

Torres’ summary judgment did not rule on all secondary sales, however. 

As no sellers other than Ripple Labs and employees were listed as defendants, that particular issue will not continue in trial. In a blind bid-and-ask trade on an exchange, the buyer does not know whether the purchased assets come from a holder other than the company or executives. 

The summary judgment did not determine whether or not a physical written contract is required as part of the Howey test. Ripple argues that because it did not have a written contract, it does not qualify as a security. 

Whether or not XRP follows “strict vertical commonality,” referring to whether investors and promoters have mutual dependence on financial success, will have to be decided at trial as well. 

The trial will hone in on the first and second prongs of the Howey test as well. The first prong pertains to “whether an ‘investment of money’ was part of the relevant transaction,” while the second focuses on “the existence of a ‘common enterprise,’” the filing read. Torres did not determine whether either prong was reached in the summary judgment. 

The fate of Ripple’s founder and former CEO Christian Larsen, and former chief operating officer and current CEO Brad Garlinghouse, will also be decided in the forthcoming trial. In its initial December 2020 complaint, the SEC charged the two with aiding and abetting securities laws violations. The summary judgment did not make a ruling on this matter. 

“Whether the common enterprise extends to encompass ‘other XRP holders,’ defendants Garlinghouse and Larsen, the ‘XRP ecosystem,’ or any other entities,” will also have to be determined in trial, Torres wrote. 

What the summary judgment means for the industry

If crypto markets are any indication, the industry considers Thursday’s summary judgment a major win. 

XRP soared more than 73% in the hours after the filing. After exchanges like Coinbase and Kraken said they would re-list, bitcoin (BTC) and ether (ETH) rallied 5% and 7%, respectively. 

“The ruling reinforces that regulatory agencies are not the judge, jury, and executioner when it comes to digital assets,” Ryón Nixon, founding partner of Horizons Law, told Blockworks. “That said, it’s only a first step. Appeals will almost certainly follow, and even this ruling doesn’t address many other important issues.” 

Other legal experts cast doubt on whether Thursday’s ruling will significantly impact the SEC’s “regulation by enforcement” strategy. 

“As one of the few successful challenges to the SEC in this area, the decision provides a window into additional structuring possibilities for token insurances and secondary market transactions,” said Joe Castelluccio, partner at Mayer Brown and leader of the firm’s fintech and digital assets, blockchain and cryptocurrency groups. “However, I don’t think this decision deters the SEC or causes it to change its approach to this industry.” 

Nor is it clear that this particular legal fight is over. 

The SEC is expected to appeal the ruling that programmatic sales are not securities, according to Rahsan Boykin, general counsel for Hashflow. The SEC has used this argument in other crypto cases, including its ongoing case against Binance, said Boykin.

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