682 F.Supp.3d 308
S.D.N.Y.2023Background:
- XRP Ledger launched in 2012 with a fixed supply of 100 billion XRP; Ripple (founded by Larsen and others) controlled a large portion of XRP and used sales to fund operations.
- From 2013–2020 Ripple engaged in three primary distributions: Institutional Sales to counterparties under contracts (~$729M alleged), Programmatic Sales on exchanges (~$758M alleged), and Other Distributions (employee compensation, Xpring grants; ~$609M recorded non-cash consideration).
- Defendants (Ripple, CEO Garlinghouse, Executive Chairman Larsen) did not register XRP offers or sales with the SEC; SEC sued for Section 5 violations and for aiding and abetting by the executives.
- At summary judgment the parties disputed (among other things) whether XRP sales constituted sales of "investment contracts" under Howey and whether defendants had fair notice.
- The Court held (1) Institutional Sales were unregistered offers/sales of investment contracts (SEC summary judgment granted on that claim), and (2) Programmatic Sales, Other Distributions, and Larsen’s/Garlinghouse’s exchange sales were not investment-contract offers/sales (defendants’ summary judgment granted as to those).
- The SEC’s motion for summary judgment on aiding-and-abetting was denied because triable issues exist as to the executives’ knowledge and the scope/timing of their substantial assistance.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether to adopt Defendants’ "essential ingredients" test for investment contracts | Howey's elements plus Defendants' three additional requirements are unnecessary | The Howey test should be read to require a promissory contract, post-sale promoter obligations, and profit-sharing rights | Court rejected the novel test; applied traditional Howey totality-of-circumstances approach |
| Whether Institutional Sales of XRP were investment contracts under Howey | Institutional buyers paid money, funds were pooled, XRP purchasers expected profits from Ripple's efforts; contracts and marketing tied sales to Ripple's efforts | Buyers paid for a token; XRP is a commodity-like asset; sales to sophisticated parties were not securities transactions requiring registration | Court held Institutional Sales were offers/sales of investment contracts (summary judgment for SEC) |
| Whether Programmatic (exchange) Sales were investment contracts | Ripple targeted speculators and increased speculative volume; many exchange buyers sought profit | Programmatic sales were blind bid/ask; buyers didn’t know they were buying from Ripple and couldn’t reasonably expect profits from Ripple’s efforts | Court held Programmatic Sales were not investment-contract offers/sales (summary judgment for Defendants) |
| Whether Other Distributions (compensation, grants) were investment contracts | Ripple effectively funded projects by transferring XRP that could be sold into public markets | Recipients did not pay money or provide tangible consideration to Ripple; no ‘‘investment of money’’ from recipients to Ripple | Court held Other Distributions were not offers/sales of investment contracts (summary judgment for Defendants) |
| Aiding-and-abetting liability for Larsen and Garlinghouse | Executives knowingly participated and substantially assisted Ripple’s unlawful Institutional Sales | Executives lacked requisite knowledge as to illegality and reduced operational roles (esp. Larsen post-2017) | Material disputes of fact exist on knowledge and substantial assistance; SEC’s motion denied on aiding-and-abetting |
| Due process / fair notice | Howey and decades of precedent gave fair notice that certain token sales can be securities | SEC lacked clear, consistent guidance for digital assets; defendants lacked fair notice as applied | Court rejected fair-notice defense as to Institutional Sales (statutory and case law provided sufficient notice) |
Key Cases Cited:
- SEC v. W.J. Howey Co., 328 U.S. 293 (establishes the investment-contract test)
- SEC v. Edwards, 540 U.S. 389 (clarifies “profits” include appreciation and other financial returns)
- Tcherepnin v. Knight, 389 U.S. 332 (totality-of-circumstances analysis; substance over form)
- Glen-Arden Commodities, Inc. v. Constantino, 493 F.2d 1027 (2d Cir. 1974) (investment-contract analysis for tangible/intangible assets)
- SEC v. Telegram Grp. Inc., 448 F. Supp. 3d 352 (S.D.N.Y. 2020) (token-sales Howey analysis; whole-scheme approach)
- SEC v. Kik Interactive Inc., 492 F. Supp. 3d 169 (S.D.N.Y. 2020) (finding token sales to contract purchasers were securities)
- Revak v. SEC Realty Corp., 18 F.3d 81 (2d Cir. 1994) (horizontal commonality doctrine)
- SEC v. Cavanagh, 445 F.3d 105 (2d Cir. 2006) (Section 5 standards; affiliate exemption discussion)
- SEC v. Apuzzo, 689 F.3d 204 (2d Cir. 2012) (elements of aiding-and-abetting liability)
- Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (summary judgment standard)