The U.S. Securities and Exchange Commission (SEC) said that a portion of the Ripple ruling was “wrongly decided,” according to documents filed in court on July 21. The part of the ruling referred to — the part that went against the SEC — stated that the sale of XRP on exchanges did not constitute a sale of securities.
The SEC’s comments were part of the filing in its lawsuit against Terraform Labs and its founder, Do Kwon. The SEC was responding to a motion to dismiss filed by the defendants, which referred to the Ripple case ruling from earlier this month.
The SEC’s comments came less than a week after SEC chair Gary Gensler said he was “disappointed” with the Ripple ruling on retail sales.
Ripple ruling conflicts with Howey Test, SEC says
The Ripple ruling, widely regarded as a win for the U.S. crypto industry, was mostly a win for the SEC, not Ripple. The SEC noted that “much of the Ripple ruling supports the SEC’s claims.”
Moreover, the court ruling concerning the sale of XRP to retail investors “conflicts with and adds
baseless requirements to Howey and its progeny,” the SEC wrote, adding:
“… Ripple’s analysis of Programmatic Sales [retail sales] cannot be squared with Howey and decades of federal securities laws jurisprudence.”
The Ripple ruling found that the sale of XRP to institutional investors counted as a sale of securities. According to the SEC, the court should have reached a similar conclusion regarding retail sales of XRP.
However, the SEC argued that the Ripple ruling created an “artificial distinction” between “sophisticated” institutional buyers and retail investors. Moreover, the ruling “improperly transforms Howey’s reasonable investor inquiry into a subjective one, and turns on its head the reasoning underlying Howey and other cases,” it added.
In other words, the Ripple ruling created two different “reasonable investor” standards for institutional and retail investors. Creating such a “subjective dichotomy is contrary to Howey,” the SEC noted.
The market watchdog concluded:
“Finally, the underlying logic of the Ripple ruling is divorced from the basic principles behind Howey and the federal securities laws more broadly. “
The SEC explained that when differentiating between institutional and retail investors, the federal securities laws provide for more protection to retail investors, not less — as is the case with the Ripple ruling. Therefore, the SEC noted that the ruling is “impossible to reconcile” with the fundamental principles of the securities laws.
Citing all these explanations, the SEC asked the court to disregard the Ripple ruling relating to retail sales in the lawsuit against Terra and Kwon.
The SEC may appeal part of the Ripple ruling
In the filing, the SEC said that its staff is considering all options for “further review” and “intends” to recommend the SEC to file an appeal.
Last week, Ripple CEO Brad Garlinghouse said it could take the SEC “years” to file an appeal. Garlinghouse added that he was “very optimistic” that even if the SEC filed an appeal, Ripple would win and solidify the recent ruling.
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