Oversold and Underwhelmed: Why the Ripple Decision Doesn’t Live Up to the Hype

Milgrom Team

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If you are like me, you have friends who tell you things like “Prague is the most beautiful city in the world,” “Prague will change your life,” “if I could only go to one city again for the rest of my life, it would be Prague.” With these rave reviews in mind, I went to Prague earlier this year fully expecting to leave a different and better human being, transformed by a rarefied charm with which the rest of the Western world could never hope to compete.

When I got there, for the first time in my life I stood in the center of a real, live foreign country and wished I was at Epcot eating warmed-over spaghetti on a motorized boat ride through “Venice.” The locals may be kind and welcoming, but I don’t know because I never met one; everywhere I went was staffed by non-locals. The history might be captivating, but I was too busy fighting for my sanity in a cathedral as crowded as a Target on Black Friday to process the audio guide I rented.[1] I waited in line at a turnstile to get into Prague Castle and thought I’d mistakenly ended up at an influencer convention for people hyping crop tops and Panama hats. Fundamentally, Prague has nothing to offer that every other European city also offers without the claustrophobia and density of other Americans and drunk Brits, and I am willing to fight anyone who disagrees with me over this elitist opinion that only interests a small population of fanatics who struggle to relate to people who aren’t interested in this topic.

In the same way, if you follow the crypto space and read the headlines about the recent decision in SEC vs. Ripple Labs, Inc., you will be grossly disappointed by the delta between hype and reality. Crypto-promoters will tell you that Ripple “won,” that tokens are not securities, and that crypto can now go on to create the New Eden that will bring freedom and prosperity to everyone. Everyone except for the teeth-gnashing demons who work at the Securities and Exchange Commission, a.k.a. the Anti-Christ.

Well, if you bought into the buzz, prepare to be trapped in a crush of selfie-stick-wielding tourists who forgot to pack deodorant because the reality does not live up to the postcard.

Procedural Background

Ripple Labs, Inc. is a blockchain company that sold a digital asset, a crypto token called “XRP,” to certain purchasers. The SEC sued Ripple for various violations of the securities laws in connection with the sale of XRP. Ripple argued that it couldn’t have violated any securities laws because XRP is not a security. The parties briefed the issue last year, and the judge issued her ruling last month.

What Really Happened

Ripple sold XRP directly to institutional buyers, hedge funds, and others, sales the court termed “Institutional Sales.” Ripple also sold XRP through the use of trading algorithms, sales the court termed “Programmatic Sales.” For these latter “blind” sales, Ripple did not know who was buying the XRP and the buyers did not know who was selling it.

The SEC classed XRP as an “investment contract,” a type of security. Ripple tried to make up its own rule for what constitutes a security, which it termed the “essential ingredients test,” but the court laughed at it and instead applied our grizzled friend, the 1946 Howey test. Howey defines an investment contract as a “contract…whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” See SEC v. W.J. Howey, Co., 328 U.S. 293, 298-99 (1946). The court also relied on the complementary black-letter law that in assessing whether a contract is a security, courts must focus on the “economic reality” of the transaction and the totality of the circumstances. See Tcherepnin v. Knight, 389 U.S. 332 (1967); Glen-Arden Commodities, Inc. v. Constantino, 493 F.2d 1027 (2d Cir. 1974).

So far, so vanilla. Where things get interesting is when the court opines that whether XRP is a security depends on who Ripple sold it to and how Ripple sold it. For example, the court held that with respect to the institutional investors, who bought XRP directly from Ripple in exchange for fiat currency, XRP was a security, based in large part on the marketing scheme Ripple aimed at these investors, which tied the value of XRP to the success of Ripple, the company. Per Ripple’s “Deep Dive for Finance Professionals” brochure, its “business model is predicated on a belief that demand for XRP will increase…if the Ripple protocol becomes widely adopted,” which sounds a lot like how stock works for companies in any other industry. Thus, the court concluded that the economic realities of the sale of XRP to institutional investors rendered XRP a security.

However, the court held that XRP was not a security with respect to purchasers who bought through the “blind” “Programmatic Sales” because those buyers did not necessarily know they were buying from Ripple and might (might) not have associated Ripple’s investment-y marketing scheme with the token they were buying. While the court acknowledged that many of these buyers might have in fact bought XRP as an investment, the court reasoned that because Ripple didn’t target the Programmatic Sales buyers with any specific promises or offers with respect to the future of Ripple or XRP’s value, XRP was not a security with respect to those buyers. The court also noted that these buyers were probably less sophisticated than the institutional investors and were thus less likely to view any of the marketing materials they did encounter online as pitching them on an investment.

What Did Not Happen 

As you can see, the court did not make any sweeping proclamation about the security-status of digital assets. In fact, it didn’t even offer a unified holding on XRP. Instead, the court held that whether XRP is a security depends on who bought it. Notably, the court specifically declined to rule on whether XRP is a security with respect to buyers who purchase XRP on an exchange, which matters because those transactions probably constitute the lion’s share of total XRP sales.

Why It Matters to You

What’s important to note is the court’s decision was very fact-specific and based heavily on the language in Ripple’s brochures and the statements its executives and spokespeople made. This limits its broader application. Moreover, this was just one decision, binding on one set of defendants in one court.

That said, if you’re still reading this article and plan to resent me for not offering any extrapolation, here is my best attempt: if you bought an unregistered token directly from the issuer and consider yourself “sophisticated,” that issuer probably sold you a security in violation of the law. But maybe not. It depends on what they told you. If you bought an unregistered token in some other way, weren’t exposed to much marketing, and consider yourself a goober, the issuer probably didn’t violate the securities laws. But, the SEC plans to appeal, so this conclusion might change soon. If you bought an unregistered token on an exchange, get out your Magic 8 Ball because nobody knows whether that sale violated the law.

Complaints I Have

I failed to mention that the concert hall in Prague doesn’t have a concession booth for snacks at intermission. So, if you show up hungry, too bad, you’re going to starve through the New World Symphony.

With respect to the Ripple ruling, beyond my disappointment at it being a non-event at the industry-level, I’m bothered by the court ignoring the reality that even people like the “Programmatic Sales” buyers are buying tokens like XRP as an investment. Sure, Ripple didn’t send a brochure to every single person who bought XRP through the Programmatic Sales or to the people buying it now on exchanges, but neither do Apple and Amazon. The reality is that the vast majority of digital asset buyers are buying crypto as an investment and do their research online before buying. This research would include much of the information sent to Ripple’s institutional investors as well as the public statements Ripple’s executives and spokespeople made about the value-proposition of XRP. So, to pretend that there is a categorical difference between Ripple’s institutional investors and everyday people buying XRP on an exchange is unrealistic.

Tune in next time for my views on Vienna (wildly underrated, please go) and the outcome of the SEC’s anticipated appeal.

[1] Actually, the history is really interesting, particularly with respect to the Czech resistance to the Nazis. However, including this nuance would undercut my analogy, and I’m not about to let facts get in the way of a good opening paragraph.



Rachel is an experienced trial lawyer, having litigated jury trials and bench trials, and represented clients in private arbitrations. She has worked with U.S. and international clients and with businesses of all sizes, from early-stage ventures to publicly traded companies.

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