On August 9, the Securities and Exchange Commission (SEC) sent a letter to U.S. District Judge Analisa Torres requesting leave to file an interlocutory appeal in SEC v. Ripple Labs, Inc. as to the two adverse liability determinations in her July 13, 2023 order. That order granted partial summary judgment in Ripple Labs’ favor regarding the sale of its XRP token. As we previously discussed here, the court held in deciding cross motions for summary judgment that defendants’ “programmatic” offers and sales to XRP buyers over crypto asset trading platforms and Ripple’s “other distributions” in exchange for labor and services did not involve the offer or sale of securities under the U.S. Supreme Court’s decision in SEC v. W.J. Howey Co.

SEC’s Request for Leave to Appeal:

Normally, the district court’s decision would not be subject to appeal at this stage of the litigation. However, in its letter to Judge Torres requesting leave to file an interlocutory appeal, the SEC argued: (1) the order’s holdings “are of particular consequence to an issue of programmatic concern to the SEC’s enforcement of the securities laws and potentially to a large number of pending litigations;” (2) there is disagreement among district courts regarding the controlling issues; and (3) interlocutory review would advance the litigation in an efficient manner by removing the possibility of two remedies phases and two trials.

Our Take:

Judge Torres held that the manner in which XRP tokens were sold, and the disclosures Ripple Labs made to its purchasers, dictated whether the XRP tokens were “securities” under the Howey test. While many in the industry lauded this decision, shortly thereafter, another judge on this same court disagreed with it. U.S. District Judge Jed Rakoff, in SEC v. Terraform Labs Pte. Ltd., explicitly “reject[ed] the approach recently adopted by another judge of this District in a similar case” and declined to “draw a distinction between these coins based on their manner of sale.”

There is no telling whether Judge Torres will grant the SEC’s request for appeal. Ripple Labs and the individual defendants are all opposing the SEC’s request, arguing “[t]here is no intra-district split over whether digital assets standing alone can be investment contracts, whether the Howey test applies, or how the Howey test should be applied to defendants’ offers and sales of XRP based on the record presented at summary judgment.” Indeed, the individual defendants are also opposing a stay of the case even if Judge Torres grants leave to immediately appeal, urging the trial to proceed on its existing schedule. However, with two different federal judges reaching different conclusions on a key question of what constitutes a “security” in this area, an appellate court’s guidance would be welcome. Still, it is no substitute for clear, industry-specific laws governing the applicability (or inapplicability) of U.S. securities laws to digital currency products. The urgent need for such legislation remains glaringly apparent.