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The United States Securities and Exchange Commission (SEC) has given its answer to the recent court ruling in its case against Ripple Labs, arguing that XRP is not a security when sold to retail investors.
Ripple’s comments were made in a separate filing as part of the SEC’s ongoing lawsuit against Terraform Labs and its founder, Do Kwon, for alleged multi-billion dollar crypto asset securities fraud.
According to the SEC, the verdict contradicts fundamental principles of securities laws, such as the Howey test, a set of criteria that determine the nature of an investment contract:
“With respect to programmatic and other sales, the SEC respectfully submits that Ripple conflicts with and adds baseless demands to Howey and his progeny. Respectfully, these parts of Ripple were ill-decided, and this Court should not follow them.
SEC files response in Do Kwon lawsuit, saying Judge Analisa Torres got it wrong #XRP decision and the agency may appeal. The kicker: “Ripple’s reasoning is impossible to reconcile with all of these fundamental principles of securities laws.”
— Dave Michaels (@davidamichaels) July 21, 2023
Terraform Labs’ attempt to dismiss the lawsuit cited Ripple Labs’ decision as a possible precedent. The SEC, however, responded by expressing its disagreement with the XRP ruling and dismissing its case against Kwon.
“Ripple erroneously creates two different ‘reasonable investor’ standards – one for institutional investors and another for retail investors – but creating such a subjective dichotomy is contrary to Howey,” the SEC said. The Commission further argued that Ripple used “‘generally less sophisticated’ investors” to give a subjective opinion on XRP as a security.
These statements surface shortly after SEC Chairman Gary Gensler admitted his disappointment with the court ruling that XRP is not a security when sold to retail investors in a recent interview with Yahoo Finance:
“So the investing public comes first — that’s how our securities laws were written — the companies that raise money, and the markets, and really protect them and protect the integrity of the markets. But I am not in a position to address ongoing application issues.
Gensler was also asked if court rulings represented an urgent need to establish clear regulations for the industry, particularly during his speech on artificial intelligence at the National Press Club. However, Gensler chose not to give a specific answer.
SEC Chairman Gary Gensler speaks about Ripple XRP decision for the first time since last week’s court decision pic.twitter.com/0lOzJEDs1e
— Whale (@WhaleChart) July 17, 2023
“And while we’re disappointed with what they said about retail investors, we continue to review and assess it.”