Ripple Files Form C Appeal Against SEC’s XRP Ruling

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Hassan Shittu

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Hassan Shittu

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October 25, 2024

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Ripple Labs has escalated its legal battle with the U.S. Securities and Exchange Commission (SEC) by filing a Form C cross-appeal in the U.S. Court of Appeals for the Second Circuit.

The filing details Ripple’s primary arguments against the SEC’s classification of its XRP token sales. Ripple is looking to overturn portions of the earlier court decision that required a $125 million penalty over its institutional XRP sales.

Ripple’s Chief Legal Officer, Stuart Alderoty, shared that the case is not about whether XRP is a security—a key ruling Ripple won in July.

Alderoty stated on X:

“XRP is uniquely situated as having clarity (alongside BTC) in not being classified as a security. The SEC is not challenging that ruling, which stands as the law of the land.”

Ripple’s Core Appeal Arguments: Form C Against SEC

Ripple’s appeal rests on four main arguments: the definition of an investment contract, the application of the Howey Test, its fair notice defense, and the specificity of the court’s injunction.

Central to Ripple’s case is its assertion that the district court misinterpreted investment contracts under the 1933 Securities Act when it ruled that Ripple’s institutional XRP sales were securities offerings.

Ripple contends that an investment contract should, by legal standards, include elements like post-sale obligations on the seller and entitle buyers to profits from the seller’s activities. Its position is that these factors were missing from its XRP sales.

Ripple also challenges how the Howey Test—a 1946 legal precedent for determining securities transactions—was applied in its case.

Specifically, Ripple disputes the court’s findings around an “investment of money” and a “common enterprise,” two essential criteria in the Howey framework.

Ripple argues that its institutional XRP sales didn’t meet these criteria, especially as the token operates in a decentralized market where investor profits are not guaranteed by Ripple’s efforts alone.

Another point of contention is Ripple’s invocation of the fair notice defense. The company asserts that the SEC’s enforcement approach failed to provide clear guidance, thus depriving Ripple of the opportunity to avoid regulatory infringement.

Pro-XRP attorney Jeremy Hogan also commented on X that if Ripple’s fair notice argument succeeds, it could “cripple the SEC enforcement regime” and set a strong precedent for future cryptocurrency cases, protecting companies from regulatory penalties due to a lack of clarity.

Ripple also disputes the court’s injunction, which required the company to “follow the law.” Ripple maintains that the vague wording lacks the specificity needed to comply fully.

Strategic Implications Amid Growth

Ripple’s case has drawn significant attention from the crypto community and institutional players because it has the potential to influence the future classification of digital assets.

Ripple’s legal team contends that a narrow and clear definition of an investment contract is essential to avoid regulatory bodies overreaching it.

Stuart Alderoty clarified that the court’s review would be based on the existing case record, with no new evidence introduced—a process Alderoty believes could streamline the proceedings and limit “the drama” that marked the trial stage.

Meanwhile, the SEC’s appeal, also moving through the appellate court, targets Ripple’s programmatic XRP sales and its employee distributions, which Judge Analisa Torres ruled were not violating securities laws.

The SEC has also expressed concern over Ripple executives Brad Garlinghouse and Chris Larsen, whom it accuses of aiding and abetting unregistered sales.

The appeals court’s eventual ruling could determine how far-reaching the SEC’s regulatory power is over digital asset transactions.

Despite these legal hurdles, Ripple continues to expand its business. In recent weeks, interest in XRP has increased, notably with applications for XRP-backed ETFs by asset managers Bitwise and Canary Capital.