In December 2020, the U.S. Securities and Exchange Commission (SEC) accused Ripple Labs Inc. of conducting an unregistered securities offering in the form of the XRP token, which we had the opportunity to report on in one of the previous articles in the technoglogy .
The above case is important from the perspective of the entire industry because it concerns one of the leading tokens and may have a direct impact on the upcoming regulations and the approach of the Commission itself, which has so far assumed that the vast majority of cryptoassets are a form of security.
It's also worth noting that the ruling in Ripple vs. SEC, one of the most high-profile cases in cryptocurrency, came even before any federal solutions regarding virtual assets were presented. Compared to the European Union, the United States lags far behind in providing clear guidelines for the classification of tokens or even the provision of services in the Web3 space, and the SEC, based on a rather conservative, if not restrictive, approach to the industry, has recently filed dozens of cases against token issuers and centralized exchanges.
Coinbase, the largest cryptocurrency exchange in the United States listed on the NASDAQ, is also battling the SEC in court. Both the Ripple and Coinbase cases hinge on the classification of cryptoassets as securities under US law and the related requirement to register individual token offerings.
In the case of Ripple Labs Inc. vs. SEC, Judge Analisa Torres unequivocally ruled that the public sale of tokens on an exchange did not constitute a violation of federal securities law. In her ruling, Judge Torres argued that purchasers of tokens from public cryptocurrency exchanges could not expect profits directly resulting from Ripple's actions, thus referring to the US Supreme Court ruling that defined the investment of money in a joint venture in which profits depend primarily on the efforts of others (the so-called Howey Test) as an investment contract and, therefore, a type of security. This also relates to the nature of exchange trading. Anonymous buy and sell orders do not allow for verification of whether a given asset is being offered by Ripple itself or another XRP holder.
On the other hand, Ripple Labs' direct sales of $728.9 million worth of XRP to institutional investors and other special buyers were deemed an unregistered securities offering, partially supporting the SEC's argument in the case. The nature of the XRP marketing, the timing of the sale, and the content of the proposal clearly indicated that investors were being offered a speculative value for the token, the achievement of which depended on Ripple's efforts to develop the blockchain infrastructure and the token itself.
The court ruling in Ripple vs. SEC is seen as a clear indication that the token itself is separate and distinct from the investment contract, even though it may be part of it.
This alert is for informational purposes only and does not constitute legal advice.
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