Written by Haim Ravia and Dotan Hammer
The U.S. District Court for the Southern District of New York has ruled that the sale of cryptocurrency to the public is not a sale of securities, but the offering to institutional stakeholders (hedge funds and other sophisticated buyers) is considered a sale of securities. The decision was delivered on the indictment that the U.S. Securities and Exchange Commission (SEC) filed against Ripple Labs Inc., the owner of the XRP cryptocurrency.
The court based its decision on the 1946 landmark Supreme Court decision in Howey, which held that an investment contract exists when there is an “investment of money in a joint venture with the expectation of profits resulting from the efforts of others.” The district court, therefore, found that in offering the XRP coin to the public, the buying member of the public did not have a reasonable expectation of profit related to Ripple’s efforts, and therefore no sale of securities took place. However, in the sale of the XRP coin to institutional buyers, Ripple made a speculative value proposition for XRP. The proposition depended on Rippler’s efforts to develop the blockchain infrastructure behind the currency. The offering to institutional buyers was therefore held to be a sale of securities.
The SEC’s indictment accused Ripple Labs of raising funds through the sale of the XRP coins as unregistered securities to investors in the U.S. and around the world. The SEC also accused Ripple of distributing billions of XRP coins for value-for-money services and making personal sales of the XRP coin of approximately $600 million, all in violation of the registration provisions of U.S. federal securities laws.
Click here to read the court’s decision in Securities and Exchange Commission v. Ripple Labs, Inc. et al.
