SEC Asserts Ripple XRP Case was 'Wrongly Decided', Signals Appeal

By Pedro Solimano

After a judge delivered a mixed win for Ripple in its lawsuit against the U.S. Securities and Exchange Commission (SEC), the agency filed new documents late Friday in its lawsuit against Terraform Labs and its CEO Do Kwon, claiming the Ripple decision was flawed and could be appealed.

According to a new set of documents filed in the Terraform Labs case yesterday, the SEC is now hinting at appealing the Ripple rulings, in which a federal judge ruled that the company did not violate securities laws in offering its native token XRP to retail investors, but did break the law when it came to institutional investors. 

The SEC move comes in response to a filing earlier this week by Terraform’s lawyers, who said the Ripple rulings strengthen their defense and support their request that the lawsuit should be dismissed. 

At the center of the controversy lies the Howey test, which is a legal test that determines whether a financial instrument constitutes an investment contract and thus falls under the regulatory purview of the SEC. 

“Contrary to Ripple’s assertions, much of the ruling supports the SEC’s claims in this case,” read the documents, adding that Ripple's practices conflict with the Howey test. “Those portions of Ripple were wrongly decided, and this court should not follow them.”

Friday’s filings against Terra and Do Kwon show that the SEC believes the judge in the Ripple case should dismiss its recent rulings related to the retail sales of XRP, claiming the company “creates an artificial distinction between the expectations of sophisticated institutional and retail investors.” Should that distinction stand, according to the SEC, it turns the Howey test “on its head.”

Even if the "hodgepodge of purported factual differences" were substantive, the SEC argues, the Ripple case benefits the SEC's position.

"The court must draw reasonable inferences in the SEC’s favor, including that the institutional buyers in this case—such as trading firms that purchased [Ripple's] crypto assets with no restrictions on resale—purchased because they viewed the assets as an investment opportunity into Terraform’s efforts."

Terraform Labs and its CEO Do Kwon have been legally battling the SEC since early this year, after the company collapsed. The lawsuit is damning, after Terra’s stablecoin UST lost its peg, and took a $40 billion platform–with retail and institutional investors–down with it. 

“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 concluded.

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