On Aug. 7, the U.S. District Court for the Southern District of New York issued its judgment in U.S. Securities and Exchange Commission v. Ripple Labs, Inc., marking the end of district court- level proceedings in the highly watched litigation. While the decision will likely be appealed, the judgment marks a milestone in the case and solidifies key holdings from the Court’s July 13, 2023 summary judgment decision.

Key Takeaways

• The Court imposed a $125,035,150 civil penalty on Ripple for its securities law violations—an amount far less than the $2 billion penalty requested by the U.S. Securities and Exchange Commission (SEC).

• Ripple is permanently enjoined from violating Section 5 of the Securities Act of 1933 (Securities Act) by selling a security in the absence of an exemption or an effective registration statement.

• When read with the court’s summary judgment decision, this injunction should not preclude Ripple from selling XRP (the native token on the Ripple blockchain) through blind/programmatic sales or paying XRP to third parties as compensation.

• While the judgment ends the district court proceedings, the case will likely be appealed, and a number of external factors may affect the case’s overall impact on the digital assets industry, including ongoing developments in other federal court cases and developments in Congress and the executive branch.

The Court’s Decision

In December 2020, the SEC sued the three defendants, alleging that their sale of XRP constituted unregistered offers and sales of securities that violated provisions of the Securities Act. In its decision on the defendants’ motions for summary judgment, the Court classified the XRP transactions at issue into four distinct categories and applied the Howey test to each category to determine whether each was an investment contract, which is a type of security.

The Court ultimately held that (1) Ripple’s institutional sales of XRP pursuant to written contracts to known institutional purchasers, such as hedge funds, on-demand liquidity customers, and other institutional buyers were investment contracts; (2) Ripple’s programmatic sales of XRP on digital asset exchanges, which were both blind (i.e., neither Ripple nor the buyer knew the other’s identity) and programmatic (e.g., sold through the use of trading algorithms) were not investment contracts; (3) Ripple’s payment of XRP to third parties, such as employees as compensation and developers to further develop the ecosystem, were not investment contracts; and (4) blind sales of XRP on digital asset exchanges by Ripple executives Christian Larsen and Bradley Garlinghouse in their individual capacities were not investment contracts. The court thus granted summary judgment to the SEC on claims against Ripple based on the first category of transactions, but it granted summary judgment to the defendants on claims based on the other three.[1]

In the recent final judgment, the Court imposed a permanent injunction prohibiting Ripple and “other persons in active concert or participation” with Ripple from selling any security without an exemption or an effective registration statement. Read in the context of the Court’s summary judgment, the injunction effectively prohibits Ripple and affiliated persons from engaging in further institutional sales (i.e., through formal contracts with known buyers) of XRP unless the sales are specifically treated as sales of securities and comply with Section 5 of the Securities Act. The injunction does not apply to the other categories of XRP sales, which the Court previously found were not investment contracts. The Court’s final judgment also imposed a $125,035,150 civil penalty on Ripple for its securities law violations related to its institutional sales of XRP. Of note, the Court did not address Ripple’s ongoing sales of XRP through its On-Demand Liquidity service. Should those be found to be investment contracts, their ongoing sale may constitute a violation of the injunction from Section 5 violations.

Conclusion

Now that judgment is entered, the SEC (which tried and failed to appeal on an interlocutory basis after the summary judgment decision) will likely appeal before the U.S. Court of Appeals for the Second Circuit. Ripple may also seek to appeal the Court’s ruling on institutional sales. In the meantime, the impact of the district court’s ruling may be affected by developments in several other pending cases—including SEC v. Binance Holdings Limited, et al., SEC v. Coinbase, Inc., et al., and SEC v. Payward Inc.—as well as by potential developments in Congress or the executive branch. In brief, all three branches of the U.S. government are now actively grappling with the issues at stake in SEC v. Ripple.

[1] Additionally, the Court found there was a genuine issue of material fact precluding summary judgment on the SEC’s aiding and abetting claims against Larsen and Garlinghouse; however, the parties subsequently stipulated to dismissal of those claims in October 2023.

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