What, legally speaking, is a cryptocurrency token sold to the public?
Following Thursday’s bombshell split decision by judge Analisa Torres of the Southern District of New York (SDNY) in SEC v. Ripple Labs et al., the answer appears to be that XRP is both an unlawfully sold investment contract when sold to VCs or institutional buyers, but a perfectly lawful, “something else” when sold anonymously via cryptocurrency exchanges, or distributed to employees or by insiders.
The only thing this ruling guarantees for cryptocurrency issuers, then, is continued uncertainty in the cryptocurrency markets – uncertainty which Congress, and only Congress, can step in to correct.
Preston Byrne, an occasional CoinDesk columnist, is a corporate partner in Brown Rudnick’s Digital Commerce group.
At issue in this case is whether a decade’s worth of token distributions by Ripple Labs are sales of securities by dint of the transactions being “investment contracts” as such term is defined by the “Howey Test” in SEC v W.J. Howey Co., 328 U.S. 293 (1946, as clarified by subsequent precedents.
That test says, in brief, that a contract, transaction or scheme involving (1) the investment of money (2) in a common enterprise with (3) a reasonable expectation of profits arising from the entrepreneurial or managerial efforts of others is a juridical critter known as an “investment contract” and is, per the federal Securities Act of 1933, to be regulated in exactly the same manner as a security.
For the purposes of conducting the Howey analysis, the court in Ripple Labs divided Ripple’s sales of tokens into three categories: (1) institutional sales to hedge funds, VCs and the like; (2) programmatic sales to retail directly on digital asset exchanges; and (3) “as a form of payment for services,” such as in restricted token purchase agreements or option contracts, to employees and other service providers.
Ripple loses on “Institutional Sales” of XRP…
On the first category, institutional sales, Ripple lost. There are few if any informed legal commentators who I have seen arguing that any court should have found otherwise.
…but it wins on programmatic sales…
On the second category of sales, programmatic sales, the Court found in Ripple’s favor, arguing that the third, “expectation of…
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