The US Securities and Exchange Commission (SEC) said part of Ripple’s decision was “erroneously decided”, according to court documents filed on July 21. The part of the ruling he was referring to — the part that went against the SEC — stated that the sale of XRP on exchanges did not constitute a sale of securities.
The SEC’s comments were part of the filing of its lawsuit against Terraform Labs and its founder, Do Kwon. The SEC was responding to a motion to dismiss filed by the defendants, which referred to the Ripple case decision from earlier this month.
The SEC’s comments came less than a week after SEC Chairman Gary Gensler said he was “disappointed” with Ripple’s retail decision.
Ripple Decision Violates Howey Test, SEC Says
Ripple’s decision, widely considered a victory for the US crypto industry, was primarily a victory for the SEC, not Ripple. The SEC noted that “the majority of the Ripple decision supports the SEC’s claims.”
Additionally, the court’s ruling regarding the sale of XRP to retail investors “contradicts and adds
baseless demands on Howey and his successors,” the SEC wrote, adding:
“… Ripple Analysis for Programmatic Sales [retail sales] cannot be compared to Howey and the jurisprudence of the federal securities laws.
Ripple’s decision revealed that the sale of XRP to institutional investors counts as a sale of securities. According to the SEC, the court should have reached a similar conclusion regarding retail sales of XRP.
However, the SEC argued that Ripple’s decision created an “artificial distinction” between “sophisticated” institutional buyers and retail investors. Moreover, the decision “improperly transforms the reasonable investor inquiry of Howey into a subjective inquiry and turns the rationale underlying Howey and other cases on its head,” he added.
In other words, the Ripple decision created two different “reasonable investor” standards for institutional and retail investors. Creating such a “subjective dichotomy” is inconsistent with Howey, the SEC noted.
The market watchdog concluded:
“Finally, the underlying logic of the Ripple decision is divorced from the basic principles behind Howey and the federal securities laws more broadly. “
The SEC explained that when distinguishing between institutional and retail investors, federal securities laws provide more protection for retail investors, not less — as is the case with the Ripple decision. Therefore, the SEC noted that the decision is “impossible to reconcile” with the fundamental principles of securities laws.
Citing all of these explanations, the SEC asked the court to disregard Ripple’s decision regarding retail sales in the lawsuit against Terra and Kwon.
The SEC may appeal part of Ripple’s decision
In the filing, the SEC said its staff is considering all options for “further review” and “intends” to recommend the SEC file a complaint.
Last week, Ripple CEO Brad Garlinghouse said it could take “years” for the SEC to file an appeal. Garlinghouse added that he was “very optimistic” that even if the SEC were to file an appeal, Ripple would win and uphold the latest ruling.