SECが2025年1月15日に提出した控訴状の文字起こしです。

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INTRODUCTION

From 2013 through 2020, defendants Ripple Labs, Inc., Christian A. Larsen (Ripple’s co-founder, former CEO, and current chairman), and Bradley Garlinghouse (Ripple’s current CEO)together offered and soldover$2billion of crypto asset XRP as investment contracts, a type of security. But because those offers and sales were not registered under the Securities Act of 1933,investorswere deprived of the important disclosures that the federal securities laws mandate when securities are offered and sold to the public, leaving investors with only the inadequate information that Ripple unilaterally provided.

The Securities and Exchange Commission brought this civil enforcement action because that failure to register violated Section 5 of the Securities Act, 15U.S.C. § 77e.Deciding cross-motions for summary judgment, the district court correctly concluded that Ripple’s offers and sales of XRP to institutional investors were offers and sales of investment contracts. But the district court erred both factually and legally in concluding that defendants’ offers and sales of XRP to public buyers who purchased on crypto asset trading platforms—including retail investors—and Ripple’s offers and sales of XRP for which Ripple received non-cash consideration were not offers and sales of investment contracts.

As the Supreme Court explained in SEC v. W.J. Howey Co., 328 U.S. 293(1946),an investment contract requires, among other things, that investors expect profits from the efforts of others. The district court reasoned that institutional investors reasonably expected profits from the efforts of others because Ripple represented that its efforts would increase the price of XRP. But the district court erroneously found that retail investors did not have that same expectation because they purchased XRP through crypto asset trading platforms and thus did not know if the seller was Ripple, a Ripple affiliate, or someone else. Under Howey, however, whether investors are led to expect profits from the efforts of others is determined not by the identity of the seller but rather by what the offeror says and does. And what Ripple said and did was repeatedly tell institutional and retail investors alike via numerous channels—including Ripple’s own website, YouTube, Reddit, online crypto asset discussion forums, and news media interviews—that Ripple’s efforts would increase the price of XRP. In buying XRP, investors therefore expected to profit based on those efforts.

The district court’s dichotomy between the expectations of institutional investors and those of retail investors is also inconsistent with Howey’s objective investor standard. And it contravenes a fundamental premise of the federal securities laws—that less sophisticated investors are no less deserving of protection than sophisticated investors.

Under Howey, an investment contract also requires an investment of money by investors. The district court erroneously concluded that Ripple’s offers and sales of XRP to Ripple employees and business partners in return for non-cash consideration failed to satisfy that requirement. But numerous courts have confirmed that non-cash consideration like that received by Ripple—labor and other services—satisfies Howey’s investment-of-money requirement.

This Court should vacate the district court’s erroneous rulings and order summary judgment for the Commission with respect to defendants’ offers and sales of XRP to retail investors and Ripple’s offers and sales of XRP for which Ripple received non-cash consideration.

JURISDICTIONAL STATEMENT

The district court had jurisdiction over this civil enforcement action pursuant to Section 22(a) of the Securities Act, 15 U.S.C. § 77v(a). The Commission timely filed its notice of appeal from the district court’s August 7, 2024final judgment (SA35-38) on October 2, 2024 (JA__-__[DKT978]). This Court has jurisdiction pursuant to 28 U.S.C. § 1291.

ISSUES PRESENTED

1. Whether the district court erred in concluding that while Ripple’s offers and sales of XRP to institutional investors were offers and sales of investment contracts, defendants’ offers and sales of XRP to retail investors were not.

2.Whether the district court erred in concluding that Ripple’s offers and sales of XRP for non-cash consideration were not offers and sales of investment contracts.

STATEMENT OF THE CASE

A. The Securities Act prohibits the unregistered offer and sale of investment contracts.

1. Securities Act registration ensures that investors have material information about their investments.

“The Securities Act… was designed to provide investors with full disclosure of material information concerning public offerings of securities.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 195 (1976).“The keystone of the Securities Act … is its substitution of a policy of disclosure for one of caveat emptor” by “clos[ing] the channels of commerce to security issues unless and until a full disclosure of the character of such securities has been made through a registration statement filed with the Commission.” SEC v. Arthur Young & Co., 584 F.2d 1018, 1025 n.51(D.C. Cir. 1978), as amended (Sept. 14, 1978) (cleaned up). The Securities Act’s registration requirements “protect the public by requiring that it be furnished with adequate information upon which to make investments.” SEC v. Chinese Consol. Bene v. Ass’n., 120 F.2d 738, 741 (2d Cir. 1940).

Absent an exemption, Sections 5(a) and (c)of the Securities Act make it “unlawful for any person, directly or indirectly,” to “offer to sell” a security unless a registration statement has been filed with the Commission or to “sell” a security unless the registration statement has become effective.15 U.S.C. §§ 77e(a), (c). Registration requires a securities issuer to disclose information about the securities and its business operations, financial condition, results of operations, risk factors, affiliates, and management. See id. §§77g, 77aa.Having filed a registration statement and made a statutory prospectus available, an issuer must then file periodic reports under the Securities Exchange Act of 1934,which imposes “extensive disclosure requirements” to “protect investors against manipulation of stock prices.” Basic Inc. v. Levinson, 485 U.S. 224, 230 (1988); see, e.g,15 U.S.C.§ 78m(a) (requiring, among other things, audited financial statements).

Thus the disclosure requirements of the federal securities laws—which are backstopped with liability for materially false statements and omissions—ensure that investors are informed about not only the benefits but also the risks of their investments. See, e.g., 15 U.S.C. § 77k (registration statements);id.§ 77l(a)(2) (prospectuses and oral communications).

2. An “investment contract”—as defined by Howey—is a security.

In delineating the scope of the federal securities laws, Congress “enacted abroad definition of ‘security,’ sufficient to encompass virtually any instrument that might be sold as an investment.” SEC v. Edwards, 540 U.S. 389, 393 (2004)(cleaned up). Included in that definition is an “investment contract.” 15 U.S.C. §§77b(a)(1), 78c(a)(10). While not statutorily defined, in Howey the Supreme Court held that an “investment contract” is “a contract, transaction[,]or scheme 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.” 328 U.S. at 298-99; Edwards, 540 U.S. at 393; see United Hous. Found., Inc. v. Forman, 421 U.S. 837, 847 n.12 (1975). Because “the word ‘solely’ should not be construed as a literal limitation,” Howey asks “whether, under all the circumstances, the scheme was being promoted primarily as an investment” for a “passive investor,” “for whose benefits the [federal] securities laws were enacted,” as opposed to an investment for which there is “significant investor control.” United States v. Leonard, 529 F.3d 83, 88 (2d Cir. 2008) (cleaned up).

In analyzing whether a contract, transaction, or scheme is an investment contract, “[f]orm [is] disregarded for substance” and “emphasis [is] placed upon[the] economic reality” based on the facts and circumstances. Howey, 328 U.S. at298;see, e.g., Leonard, 529 F.3d at 85 (considering “the reality of the parties’ positions”); Glen-Arden Commodities, Inc. v. Costantino, 493 F.2d 1027, 1034 (2dCir. 1974) (considering “the economic reality and the totality of circumstances”). That approach “embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.” Howey, 328 U.S. at 299; see also SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 351 (1943) (“investment contract” can reach “[n]ovel, uncommon, [and] irregular devices”).

Applying Howey, courts have found a wide variety of contracts, transactions, and schemes to be investment contracts. See, e.g., Edwards, 540 U.S. at 393-97 (payphone sale-and-leaseback arrangements); Howey, 328 U.S. at 298-300 (interests in citrus tracts); Leonard, 529 F.3d at 87-91 (interests in films); SEC v. Aqua-Sonic Prods. Corp., 687 F.2d 577, 581-85 (2d Cir. 1982) (dental product licenses); Glen-Arden, 493 F.2d at 1034-35 (interests in whiskey casks). More recently, courts applying Howey have found that offers and sales of crypto assets may, depending on the facts and circumstances, be offers and sales of investment contracts. See, e.g., SEC v. Rivetz Corp., No. 21-cv-30092, 2024 WL 4892590, at*6-7 (D. Mass. Sept. 30, 2024); SEC v. Grybniak, No. 20-cv-327, 2024 WL4287222, at*6-12 (E.D.N.Y. Sept. 24, 2024); SEC v. Payward, Inc., No. 23-cv-06003, 2024 WL 4511499, at *12-17 (N.D. Cal. Aug. 23, 2024); SEC v. Balina, No.22-cv-00950, 2024 WL 2332965, at *8-11 (W.D. Tex. May 22, 2024);SEC v. Coinbase, Inc., 726 F. Supp. 3d 260,290-96(S.D.N.Y. 2024); SEC v. Wahi, No.22-cv-01009, 2024 WL 896148, at *4-7 (W.D. Wash. Mar. 1, 2024); SEC v. Terraform Labs Pte. Ltd., 684 F. Supp. 3d 170,193-98 (S.D.N.Y. 2023); SEC v. Arbitrade Ltd., 668 F. Supp. 3d 1290, 1300-02 (S.D. Fla. 2023); SEC v. LBRY, Inc., 639 F. Supp. 3d 211, 216-21 (D.N.H. 2022); Audet v. Fraser, 605 F. Supp. 3d 372, 394-99 (D. Conn. 2022); SEC v. NAC Found., LLC, 512 F. Supp. 3d 988, 995-97 (N.D. Cal. 2021); SEC v. Kik Interactive Inc., 492 F. Supp. 3d 169, 177-80 (S.D.N.Y. 2020); SEC v. Telegram Grp. Inc., 448 F. Supp. 3d 352, 367-79 (S.D.N.Y. 2020); SEC v. Blockvest, LLC, No. 18-cv-2287, 2019 WL 625163, at*4-9 (S.D. Cal. Feb. 14, 2019).

B. Defendants made unregistered offers and sales of XRP.

1. Ripple created and fostered XRP trading markets to monetize its XRP holdings.

In 2012, a team that included David Schwartz, who later became Ripple’s chief technology officer, programmed what is now called the “XRP Ledger,” a blockchain (cryptographically-secured ledger) that records transactions across a network of computers. JA__, __[DKT629¶¶ 10-13, 40]. The team also created a finite supply of100 billion “Ripples,” now called “XRP,” a crypto asset that resides within the XRP Ledger as its native token. JA__-__[DKT629¶¶ 14, 16].

Later in 2012, Larsen, who served as Ripple’s CEO through 2016 and has chaired its board of directors since 2013, and others founded what is now Ripple. JA__[DKT629¶¶ 860-61]. Ripple retained 80 billion XRP for its treasury and the other 20 billion XRP were retained by the founders. JA__, __[DKT629 ¶¶ 15, 41].

When Ripple was founded, there was no trading market and no market price for the 80 billion XRP that it held. JA__[DKT629 ¶ 104]. As Ripple publicly explained, its “business model [was] predicated on a belief that demand for XRP will rise (resulting in price appreciation) if the [XRP Ledger] becomes widely adopted.” JA__[DKT629 ¶¶ 60-61]. To drive that demand—and an increase in XRP’s price—Ripple worked to position the XRP Ledger as a payment platform that used XRP as a “bridge” to effect transactions between other assets, such as different currencies. See, e.g., JA__-__[DKT629 ¶¶ 57-58,63-76].

But developing products that utilized XRP to effect such transactions was—in Larsen’s words— “extremely expensive.” JA__[DKT629¶ 93]. That is because Ripple’s products were intended “to solve a multi-trillion dollar problem–the global payment and liquidity challenges that banks, payment providers and corporat[ions] face.” JA__[PX500.15]. Ripple had to create a liquid trading market for XRP so that Ripple could sell some of its XRP to generate funds for the development of XRP-related products and applications. Moreover, sufficient liquidity in the XRP market was a “precondition” to the uptake of such products. JA__-__[DKT629 ¶¶ 109-34]. That is because using XRP to effect a transfer between, for example, U.S. dollars and Mexican pesos required both someone willing to sell XRP for dollars and someone willing to buy XRP with pesos. To effect such transfers at a commercially viable scale required significant trading volume in XRP across various markets.

To jump start this necessary trading market, Ripple worked to get XRP listed on various crypto asset trading platforms and allocated XRP to market makers and others to resell XRP on those platforms(none of which were registered as a securities exchange, where a security cannot be traded without an effective registration statement, see15 U.S.C. § 78l(a)). JA__-__,__-__[DKT629 ¶¶ 479-85, 487-99,592-605]. Ripple believed that speculative trading on those platforms would serve as the “catalyst to the XRP flywheel.” JA__[DKT629 ¶ 214]; see also, e.g., JA__,__, __[DKT629 ¶¶ 476, 490,670-73]. As Garlinghouse, who joined Ripple in 2015 and became its CEO in January 2017, explained in2019,“onXRP itself, and really I would say crypto broadly … 99.9 percent of all crypto trading is speculation today.” JA__, __[DKT629 ¶¶ 42, 112].

2. Ripple publicly promoted XRP as an investment in Ripple’s efforts to increase XRP’s value.

To foster investment interest in XRP, Ripple conducted a relentless, years-long, multi-channel, public marketing campaign that touted its efforts to increase XRP’s value and promoted XRP as an opportunity to invest in—and financially benefit from—the enterprise developed by Ripple’s efforts.

In numerous public statements, Ripple promoted the efforts that it was under taking to enhance XRP’s value. See JA__-__[PX500].For example, Ripple’s website stated that Ripple was “a responsible steward of XRP supply” and that it had “demonstrated a tremendous track record of investing in and supporting the XRP ecosystem.” JA__[PX500.15]. And starting in 2016,Ripple’s website also included quarterly “XRP Markets Reports.” Ripple explained that it was issuing the XRP Markets Reports as “part of being a responsible stakeholder” and that the reports were intended to “continually improve the health of XRP markets globally” by providing updates on the “state of the market.” JA__, __-__[DKT629 ¶¶ 267-68, 500-02, 504-11]. The XRP Markets Reports stated, for example, that:

• Ripple had started an initiative called “xPring” to “develop use cases for XRP” (JA__[DKT629 ¶ 364]; see infra 18);
• Ripple was “accelerating the pace of [its] investment in the XRP Ledger” (JA__-__[DKT629 ¶ 509]);
• Ripple was “expand[ing] [its] partnerships” to promote “usage of XRP as a liquidity solution for more and more corridors” (JA__-__[PX501.04]); and
• “[The] increased global reach [of XRP was] the result of Ripple’s continued investment in the XRP ecosystem” (JA__-__[PX501.05]; see also JA__-__[PX501]).

Key Ripple executives also repeatedly publicly touted Ripple’s efforts to make XRP a profitable investment. See JA__-__, __-__[PX502, PX506]. For example, in 2013,Schwartz wrote on Bitcoin Forum that Ripple “do[es]n’t currently plan to do anything but develop and promote the Ripple payment network” to “increase the value and liquidity of XRP.” JA__, __[DKT629 ¶¶ 117,202]; see also JA__-__[PX507].And in 2017he wrote on XRP Chat(“The Largest XRP Crypto Community Forum”) that XRP investors realized a “huge advantage” from Ripple holding a “significant fraction” of XRP because “Ripple could spend $100 million on something that has no conventional way of creating revenue, but if it pushed the price of XRP up by one penny over the long term, Ripple would massively profit.” JA__, __[DKT629¶¶77,438]; see also JA__-__[PX508].

Garlinghouse himself stated in a 2017 video available on YouTube that Ripple was “just getting started” and that Ripple would “continue to work with exchanges globally and market makers, making sure [it was] doing everything [it could] to make XRP successful on a liquidity basis,” and “investing in other use cases for the XRP ledger.” JA__-__[DKT629 ¶ 467]. He stated at a 2018 press conference that “Ripple is very, very interested in the success and the health of the [XRP] ecosystem and will continue to invest in the ecosystem.” JA__[DKT629¶469]. In a2020 interview, he stated that “[Ripple] own[s] a lot of XRP. So do I care about the overall XRP market? 100 per[]cent.” JA__-__[DKT629 ¶ 252]. And Garlinghouse explained in a 2018 interview with Yahoo Finance that Ripple would “do things to invest in the success of the XRP ecosystem because that’s in [Ripple’s] best interest” as “the most interested party in the success of the XRP ecosystem.” JA__-__[PX503.09].

Ripple also promoted the ability of its team to enhance XRP’s value. On its website, Ripple explained that it was attracting a “diverse set of talented individuals with experience in relevant technology and financial services companies.” JA__[DKT629 ¶¶ 60-61]. And posting on the social networking platform Reddit, Schwartz wrote that what “really set[s] XRP apart from any other digital asset” was that, among other things, Ripple had “[an] amazing team of dedicated professionals that Ripple ha[d] [managed]to amass to develop an ecosystem around XRP.” JA__[DKT629¶345]; see also, e.g., JA__[DKT629 ¶ 435]; JA__-__[DKT629¶ 439].

The public marketing campaign also emphasized that XRP could be bought and sold on crypto asset trading platforms and that Ripple would continue working to improve XRP liquidity. For example, Ripple’s website included a list of the crypto asset trading platforms on which XRP was listed and the XRP Markets Reports provided updates on new listings. JA__-__[DKT629 ¶¶ 511, 516-17].The XRP Markets Reports explained that “Ripple play[ed] a responsible role” with respect to XRP liquidity, which included “be[ing] a buyer in the secondary market” and reducing or pausing its XRP sales to stabilize XRP’s price. JA__[DKT629 ¶¶ 584-89].

Ripple also tied its efforts to XRP’s price. For example, in a 2014 interview, Larsen stated that “if the protocol is successful [the] digital asset will almost definitionally be successful as well” because “[l]ongterm primary use” is “the most important source of demand.” JA__[DKT629 ¶ 377]. In 2015, Ripple posted on XRP Talk that “[w]hat affects XRP price long-term is adoption of the [Ripple]protocol and growth of the ecosystem.” JA__[DKT629 ¶ 378]. In a 2017 Bloomberg interview posted to YouTube, Garlinghouse stated that “the more utility you can derive from [XRP,] the more use case[s] you can derive, the more valuable they’ll be.” JA__[DKT629 ¶ 387]. And in a 2017 post on social question and answer website Quora, Schwartz explained that Ripple was working to increase adoption of XRP “to increase demand for XRP to increase the value we can extract from our stash of XRP.” JA__-__[DKT629 ¶ 388].

Attempting to quantify what Ripple’s efforts meant for XRP investors, in a2017Redditpost, Schwartz wrote that “Ripple [was] targeting XRP at eliminating inefficiency in international payments,” and, if successful, XRP’s price would increase to “roughly $20”or perhaps even “higher.” JA__[DKT629 ¶ 389]. And in a 2020 interview, a Ripple executive stated that XRP could “outperform” other investments by 15% if it achieved “3% exposure” to the “trillions” of dollars of market opportunity that XRP was “solving for.” JA__, __[DKT629¶¶55,455].

When XRP’s price increased from $0.0064 to $2.30in 2017, Ripple publicly proclaimed that the increase was proof that its efforts were increasing XRP’s price. JA__-__[DKT629 ¶¶ 400-06, 408-20]. For example, in an interview with website CoinDesk, Garlinghouse stated that the “significant rally in XRP prices” was “reflective of a lot of work we have done to make Ripple a very compelling solution.” JA__-__[PX502.08]. In an interview with CNBC, he stated that “[p]eople are looking at the success Ripple has been having as a company, and  I think that’s increased the value of XRP.”JA__-__[PX502.04];see also, e.g., JA__[DKT629¶ 435]. And Ripple’s XRP Markets Reports tied the increase in XRP’s price to “key developments” that included Ripple’s efforts to spur adoption of XRP. JA__-__[DKT629¶¶ 421-24].

Ripple also publicly touted its efforts to prevent XRP’s price from rapidly decreasing. Ripple announced its creation of a cryptographic “escrow” account that purportedly limited Ripple’s ability to liquidate its XRP stake. JA__[DKT629 ¶¶ 308-09]. According to Ripple’s public announcement, the escrow “underscore[d] Ripple’s commitment to building XRP liquidity and a healthy and trusted market,” including because it precluded Ripple from crashing XRP’s price by selling large quantities into the market and because it further aligned Ripple’s fortunes with investors’ fortunes. JA__[PX500.15].

Evidence demonstrated that, as a result of Ripple’s public marketing campaign, investors viewed XRP as an investment in Ripple’s enterprise dedicated to increasing demand for and the value of XRP. See, e.g., JA__-__[DKT629 ¶¶ 877-902]. By 2017, “How to buy XRP” had increased in frequency to become the “most common type of request” for Ripple’s customer support. JA__[DKT668¶ 397]. Ripple, for its part, directed “investment[] inquiries” to its “guide to getting XRP” webpage, which contained links on “how to buy XRP.” JA__[DKT629¶ 608]. And it was not only investors that understood XRP to be an investment in Ripple’s managerial and entrepreneurial efforts to increase XRP’s price. See, e.g., JA__-__[DKT629 ¶¶ 903-13]. Indeed, in many instances “XRP” and “Ripple” were treated as synonymous. See, e.g., JA__-__[DKT629 ¶¶ 914-22]; see also JA__-__[DKT629 ¶ 450] (The Wall Street Journal referring to an increase in the price of XRP as “Ripple’s 1,184 % surge”). Garlinghouse himself stated in a 2017 Bloomberg interview that “XRP … is Ripple’s digital asset.” JA__[DKT629 ¶ 387].

3. Defendants offered and sold over $2 billion of XRP to investors in unregistered transactions.

Throughout the period in which Ripple was taking steps to increase demand for XRP based on promised efforts to increase XRP’s value, defendants offered and sold XRP to investors.

From late 2013 through 2020, Ripple offered and sold approximately $728.9 million of XRP to institutional and other accredited investors in unregistered transactions. JA__[DKT629 ¶ 716]; see17 C.F.R. § 230.215 (“accredited investor”). And between November 2014 and September 2019, Ripple offered and sold approximately $757 million of XRP to public buyers—including retail investors—who purchased in unregistered transactions on crypto asset trading platforms that did not disclose the identity of the seller. JA__-__[DKT629 ¶¶ 647,652].

From at least 2013 through 2020, Larsen, who retained nine billion XRP when Ripple was founded, offered and sold XRP on crypto asset trading platforms in unregistered transactions, making approximately $450 million from those sales. JA__[DKT629 ¶ 868]. And from 2017 through 2020, Garlinghouse, who received XRP as executive compensation, offered and sold approximately $150 million of XRP in unregistered transactions on crypto asset trading platforms. JA__-__,__[DKT629 ¶¶ 844-49, 870]. Garlinghouse’s sales included selling millions of dollars of XRP to retail investors on crypto asset trading platforms at the same time that Ripple was—at Garlinghouse’s behest—purchasing XRP in the secondary market in order to maintain and/or increase XRP’s price. See, e.g., JA__-__[DKT629 ¶ 777-78]. Indeed, Garlinghouse was selling XRP while publicly stating “I’m long XRP. I’m very, very long XRP as a percentage of my personal…balance sheet.” JA__[DKT629 ¶ 1145].

Ripple also offered and sold more than1.5billion XRP in unregistered transactions for consideration other than cash, with an understanding that the various recipients would further distribute the XRP into the public markets. JA__-__[DKT629 ¶¶ 827-43]. From 2013 through 2020,Rippleobtainedmore than $609 million in revenue from three types of non-cash XRP transactions. JA__[DKT629 ¶ 147]; JA__[DKT668 ¶¶ 141].

First, from 2014 through 2020,Ripple paid employees XRP in exchange for their labor. JA__-__, __-__[DKT629 ¶¶ 217-18, 844-59]. For example, Ripple’s head of product development was paid bonuses in XRP. JA__, __[DKT629 ¶¶ 46,854].

Second, Ripple gave XRP to business partners that provided services to Ripple. See, e.g., JA__[DKT629 ¶¶ 829]. For example, Ripple allotted XRP to MoneyGram International, Inc.to incentivize MoneyGram’s use of a Ripple software product. See, e.g., JA__, __, __[DKT668 ¶¶ 177, 213, 455].

Third, as part of its “xPring” initiative, Ripple supplied at least776millionXRP to business partners supporting the development of XRP applications. JA__,__[DKT629 ¶¶ 260, 831-34]. For example, Ripple distributed XRP to Coil Technologies, Inc. to “perform certain development services to promote technologies of interest to Ripple.” JA__[DKT668 ¶¶ 85-86]; see also JA__-__[DKT668 ¶¶ 110-32].

All told, Ripple, Larsen, and Garlinghouse together offered and sold over $2 billion of XRP in unregistered transactions.

C. The district court granted partial summary judgment to the Commission and partial summary judgment to defendants.

The Commission brought this civil law enforcement action, alleging that defendants violated Sections 5(a) and (c) of the Securities Act by offering and selling unregistered XRP, and also that Larsen and Garlinghouse aided and abetted Ripple’s Section 5violations. JA__-__[DKT46]. To prove a violation of Section5, the Commission must show that no registration statement was filed when a security was offered or was effective when a security was sold, and that the defendant directly or indirectly offered or sold the security through interstate commerce. SEC v. Cavanagh, 445 F.3d 105, 111 n.13 (2d Cir. 2006).

Following discovery, the Commission and defendants cross-moved for summary judgment. It is undisputed that defendants utilized the means of interstate commerce and that no registration statement filed. SA10. The district court’s summary judgment order therefore focused on the question of whether defendants’ offers and sales of XRP were investment contracts under Howey. The district court concluded that this was a “legal question” that it could “resolve[] based on the undisputed record.” SA15; see SEC v. Thompson, 732 F.3d 1151, 1160-61 (10th Cir. 2013) (“[W]hether an instrument is a security is a question of law and not of fact.”) (cleaned up).

1. The district court granted partial summary judgment in favor of the Commission with respect to Ripple’s offers and sales of XRP to institutional investors.

With respect to institutional investors—“sophisticated individuals and entities” — the district court concluded that Ripple offered and sold investment contracts. SA16-22.There was an investment of money because the investors “invested money by providing fiat or other currency in exchange for XRP.” SA16.There was a common enterprise because (a) Ripple “pooled the proceeds of its [i]nstitutional [s]ales,” (b) “Ripple used the funds it received from its [i]nstitutional [s]ales to promote and increase the value of XRP by developing uses for XRP and protecting the XRP trading market,” and (c) accordingly, each institutional investor’s “ability to profit was tied to Ripple’s fortunes and the fortunes of other[institutional investors].” SA17-18. Finally, “reasonable [institutional] investors… would have purchased XRP with the expectation that they would derive profits from Ripple’s efforts.” SA18-22.

In finding that institutional investors expected to profit from Ripple’s efforts, the district court pointed to Ripple’s public marketing campaign, including that Ripple “touted XRP as an investment tied to the company’s success,” that Ripple “connect[ed] XRP’s price and trading to [Ripple’s] own efforts,” and that “Ripple’s senior leaders [made] similar statements on various public channels.” SA18-21. The district court also pointed to certain lockup provisions and resale restrictions that some institutional investors agreed to in purchasing XRP as “inconsistent with the notion that XRP was used as a currency or for some other consumptive use,” rather than purchased for profit. SA21-22. The district court concluded that “[f]rom Ripple’s communications, marketing campaign, and the nature of the [i]nstitutional [s]ales, reasonable investors would understand that Ripple would use the capital received from its [i]nstitutional [s]ales to improve the market for XRP and develop uses for the XRP Ledger, thereby increasing the value of XRP.” SA19.

The district court thus granted the Commission partial summary judgment with respect to Ripple’s offers and sales of XRP to institutional investors.¹⁾The district court denied Larsen and Garlinghouse summary judgment on the aiding and abetting claim, finding that there were issues of fact as to their knowledge or reckless disregard of Ripple’s Section 5 violations with respect to institutional offers and sales and as to Larsen’s substantial assistance with respect to certain institutional offers and sales. SA30-33. There after, the parties entered into a stipulation dismissing with prejudice the Commission’s claim that Garlinghouse and Larsen aided and abetted Ripple’s violations of Section 5 with respect to institutional offers and sales. JA__-__[DKT921]. But if this Court determines that Ripple violated Section 5 with respect to its offers and sales to retail investors, the district court would still need to determine whether Larsen and Garlinghouse aided and abetted those violations. See infra 55.

2. The district court granted partial summary judgment in favor of Ripple with respect to Ripple’s offers and sales of XRP to retail investors.

With respect to Ripple’s offers and sales to retail investors, the district court reached the opposite conclusion. The district court found that Ripple’s offers and sales to “public buyers…on digital asset exchanges” did not satisfy Howey’s expectation-of-profits requirement and thus granted Ripple partial summary judgment with respect to its offers and sales to retail investors. SA22-25. The district court concluded that retail investors “could not reasonably expect” “that Ripple would use the capital it received from its sales to improve the XRP ecosystem and thereby increase the price of XRP.” SA23. The district court reasoned that because Ripple’s sales to retail investors were “blind bid/ask transactions,” retail investors “could not have known if their payments of money went to Ripple” and “Ripple did not make any promises or offers” to those investors “because Ripple did not know who was buying the XRP.” SA23-34.

The district court also found that Ripple’s offers and sales to retail investors “lacked other factors present in the economic reality” of Ripple’s offers and sales to institutional investors that “cut in favor of finding” Howey’s expectation-of-profits requirement satisfied. SA24. First, the sales to retail investors “were not made pursuant to contracts that contained lockup provisions, resale restrictions, indemnification clauses, or statements of purpose.” SA24. Second, while two of “Ripple’s promotional materials” were “widely circulated” among institutional investors, the district court found that“ there is no evidence that th[o]se documents were distributed to the general public.” SA24-25. Third, the district court found that there was no evidence that retail investors“ understood that statements made by Larsen, Schwartz, Garlinghouse, and others were representations of Ripple and its efforts.” SA25. Finally, the district court found that while the institutional investors “were sophisticated entities” that “would have been aware of Ripple’s marketing campaign and public statements connecting XRP’s price to [Ripple’s] own efforts,” “[t]here is no evidence that a [retail investor], who was generally less sophisticated as an investor, shared similar understandings and expectations and could parse through” the public marketing campaign. SA25 (cleaned up).

3. The district court granted partial summary judgment in favor of Larsen and Garlinghouse with respect to their offers and sales of XRP to retail investors.

With respect to Larsen’s and Garlinghouse’s personal offers and sales to retail investors, the district court similarly concluded that they did not satisfy Howey’s requirement of an expectation of profits based on the efforts of others and thus granted Larsen and Garlinghouse partial summary judgment. SA27-28. The district court reasoned that, like Ripple’s offers and sales to retail investors, “Larsen’s and Garlinghouse’s XRP sales were … on … digital asset exchanges through blind bid/ask transactions,” and that because “Larsen and Garlinghouse did not know to whom they sold XRP, and the buyers did not know the identity of the seller,” “as a matter of law, the record cannot establish the [expectation-of-profits requirement] as to th[o]se transactions.” SA27.

4. The district court granted partial summary judgment in favor of Ripple with respect to Ripple’s offers and sales of XRP for non-cash consideration.

The district court recognized that Ripple’s offers and sales of XRP for non-cash consideration “include[d] distributions to employees as compensation and to third parties … to develop new applications for XRP and the XRP Ledger,” and that Ripple recorded what it received in exchange for those sales as “consideration other than cash.” SA26 (cleaned up). But the district court nonetheless found that those offers and sales “d[id]not satisfy Howey’s [requirement] that there be an investment of money” because “Howey requires a showing that the investors provided the capital, put up their money, or provided cash” and “the record shows that recipients…did not pay money or some tangible and definable consideration to Ripple.”SA26(cleaned up). The district court thus concluded that those offers and sales “did not constitute the offer and sale of investment contracts” and granted Ripple partial summary judgment. SA27.

D. The district court declined to certify its summary judgment order for appeal and later entered judgment for the Commission.

On October 3, 2023, the district court denied the Commission’s motion pursuant to 28 U.S.C. § 1292(b) for certification to appeal the summary judgment order’s grant of partial summary judgment in favor of defendants. JA__-__[DKT917].

On August 7, 2024, the district court granted in part and denied in part the Commission’s motion for entry of final judgment against Ripple. JA__-__[DKT973]. The district court granted the Commission’s request to permanently enjoin Ripple from future violations of Section 5, but it denied the Commission’s request for a conduct-based injunction prohibiting Ripple from engaging in any unregistered institutional offers and also denied the Commission’s request for disgorgement of Ripple’s net profits from institutional sales. Finally, concluding that a per-violation penalty at the first-tier maximum was appropriate and finding that 1,278 institutional sales violated Section 5, the district court imposed a total civil penalty of $125,035,150.²⁾If defendants are found liable with respect to the offers and sales as to which the district court granted defendants partial summary judgment, the district court would have the opportunity to consider further injunctive relief and additional monetary remedies — including disgorgement and/or civil penalties with respect to the more than $1 billion defendants obtained from those offers and sales. See infra 55.

STANDARD OF REVIEW

This Court reviews a grant of summary judgment de novo. See, e.g., Brandon v. Royce, 102 F.4th 47, 54 (2d Cir. 2024). “Summary judgment is appropriate only where there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Id. (cleaned up). “In determining whether there are genuine disputes of material fact, [this Court is]required to resolve all ambiguities and draw all permissible factual inferences in favor of the party against whom summary judgment is sought.” Id. (cleaned up).

SUMMARY OF ARGUMENT

1. The district court’s conclusion that an investor cannot reasonably expect profits from the efforts of an issuer unless the investor knowingly purchases the investment from that issuer or its affiliate is contrary to both applicable law and the undisputed facts. It finds no support in Howey, which focuses on the economic reality of the transaction rather than the identity of the seller. And it is contrary to foundational provisions of the federal securities laws, including those that prohibit issuers from engaging in the unregistered offer and sale of securities directly or indirectly through conduits. The district court’s conclusion is also irreconcilable with the undisputed facts regarding Ripple’s extensive public marketing campaign about its efforts to increase XRP’s price.

The district court further erred in drawing a dichotomy between the expectations of institutional investors and those of retail investors. The district court’s assumption that only a “sophisticated” investor would have been aware of Ripple’s representations that its efforts would increase the price of XRP cannot be squared with Ripple’s public marketing campaign, which specifically engaged “less sophisticated” investors. In these circumstances, the distinctions that the district court drew between those groups of similarly situated investors contravenes the objective investor standard established in Howey.

2. The district court granted Ripple partial summary judgment with respect to its offers and sales of XRP for non-cash consideration based on the erroneous conclusion that Ripple had not received an investment of money in exchange for that XRP. But the consideration that Ripple undisputedly received—labor and other services — satisfies Howey’s investment-of-money requirement.

ARGUMENT

I. The district court erred in concluding that as a matter of law retail investors did not reasonably expect profits based on Ripple’s public representations that it would increase XRP’s price.

The fundamental premise of the district court’s rulings as to defendants’ offers and sales to retail investors is that XRP investors cannot have been led to expect profits based on the efforts of others unless the investors knew that they were purchasing XRP directly from Ripple or its affiliates. But under Howey, whether investors were led to expect profits is based not on the identity of the seller but on the economic reality of what the issuer said and did in offering the investment. And while the district court distinguished between what institutional investors and retail investors were led to expect, Howey imposes an objective investor standard and Ripple’s public marketing campaign targeted and reached both institutional investors and retail investors. Ripple publicly promised that it would create a rising tide that would lift the price of XRP for all investors, whether having purchased from Ripple, its affiliates, or a third party. Based on these promises, a reasonable investor would have anticipated that increases in the price of XRP were the result of Ripple’s efforts. And the district court’s ultimate conclusion — that registration and its accompanying disclosures were required for offers and sales to “sophisticated” investors but not for offers and sales to “less sophisticated” investors — turns the protective purpose of the federal securities laws on its head.

A. XRP investors were led to expect profits based on Ripple’s efforts.

Howey asks whether an investor reasonably expected profits from the entrepreneurial or managerial efforts of others. Forman, 421 U.S. at 852. An expectation of profits exists when investors invest because of “the prospects of are turn on their investment[s].” Howey, 328 U.S. at 300. That includes “[an] increased value of the investment” — profit distributions are not required. Edwards, 540 U.S. at 394. What matters is “whether the typical investor who was being solicited would be expected under all the circumstances to … remain[] passive and deriv[e] profit from the efforts of others.” Aqua-Sonic, 687 F.2d at 582-83.

In determining what investors were “led to expect, ”Howey, 328 U.S. at 299, courts analyze “the terms of the offer, the plan of distribution, and the economic inducements held out to the prospect” in any medium. Joiner, 320 U.S. at 353; see id. at 346 (considering “sales campaign” and “sales literature”); Howey, 328 U.S. at 296-97 (considering what was “represented” to investors, including via “advertising” and “a sales talk”); Edwards, 540 U.S. at 392 (considering a brochure and other “marketing materials” and “Web site” representations); SEC v. Merch. Cap., LLC, 483 F.3d 747, 756, 760 (11th Cir. 2007) (considering “all the representations made by the promoter in marketing the interests, not just … the legal agreements”); Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 756 F.2d 230, 240 (2d Cir. 1985)(considering the issuer’s “implicit promise to maintain its marketing efforts”); Glen-Arden, 493 F.2d at 1031,1034-35 (considering “sales literature,” including “fancy brochures touting [the] investment plan,” and “a canned sales pitch”).

Here, Ripple’s public representations that it was working to increase the price of XRP invited all investors—retail and institutional alike, regardless of whether they knew that they were purchasing XRP from Ripple—to expect profits (through an increase in XRP’s price) from Ripple’s efforts. Ripple explained—including on its website, on social networking platforms, in interviews in international publications, and on television and YouTube—that its entire business plan was to increase XRP’s price by increasing the demand for XRP. See supra 8-9, 10-16. As Schwartz, Ripple’s chief technology officer, put it in an online discussion forum post, Ripple “do[es]n’t currently plan to do anything but develop and promote the Ripple payment network” to “increase the value and liquidity of XRP.” See supra 11.

Ripple also publicly touted its past, current, and future efforts to increase demand for XRP to increase XRP’s price. See supra 10-16. For example, Ripple’s XRP Markets Reports—published on Ripple’s website—provided quarterly updates regarding Ripple’s efforts to grow demand for XRP. See supra 10-11. And Garlinghouse explained on YouTube that Ripple was “doing everything [it could] to make XRP successful on a liquidity basis,” including “investing in other use cases.” See supra 12.

In addition, Ripple publicly promoted its ability—and the expertise of its employees—to drive demand for XRP. See supra10-16. For example, Schwartz wrote on Reddit that Ripple stood out from other crypto companies due to its “amazing team” that was “develop[ing] an ecosystem around XRP.” See supra 12-13. And Ripple publicly connected its efforts to increase demand for XRP to increases in XRP’s price—including Garlinghouse stating in an interview that such an increase was “reflective” of Ripple’s work. See supra 14-15. Ripple similarly publicly promoted its efforts to develop and stabilize an XRP secondary trading market—including by escrowing some of its XRP stash—which created the liquidity necessary for investors to realize gains derived from Ripple’s efforts. See supra 13, 15. Finally, Ripple cast its efforts as technologically complex, expensive, and time-consuming. See supra 9, 10-16. For example, Garlinghouse stated in 2017 that Ripple was “just getting started” on its long-term goals and plans with respect to XRP, and Ripple described what it sought to solve as a “multi-trillion-dollar” problem (i.e., one that an investor would be relying on others to address). See supra 9, 12.

As a result of those representations, all XRP investors—not just institutional investors who purchased XRP knowingly from Ripple—reasonably expected profits from Ripple’s efforts to increase the price of XRP. Representations on Ripple’s website and social networking platforms and in news reports, for example, were equally accessible to retail and institutional investors alike. And, as other district courts have correctly concluded, such representations lead investors to expect profits based on others’ efforts. See, e.g., Coinbase, 726 F. Supp. 3d at 292 (concluding that “[t]he SEC has plausibly alleged that issuers and promoters …—through websites, social media posts, investor materials, town halls, and other for a—repeatedly encouraged investors to purchase tokens by advertising the ways in which their technical and entrepreneurial efforts would be used to improve the value of the asset”); Terraform, 684 F. Supp. 3d at 196 (concluding that a crypto asset issuer’s “social media posts” and “monthly investor reports” touting its “investing and engineering experience” were sufficient to create an expectation of profits); Telegram, 448 F. Supp. 3d at 372 (concluding that an expectation of profits was sufficiently established through, among other things, evidence that the crypto asset issuer promoted its ability to support the asset’s market price); LBRY, 639 F. Supp. 3d at 220 (concluding that an expectation of profits was sufficiently proven by the crypto asset issuer “signal[ing] that it was motivated to work tirelessly to improve the value of its blockchain for itself and any…purchasers”).

B. The district court erred in requiring that investors know that the seller is Ripple or its affiliate for investors to expect profits from the efforts of others.

The district court relied heavily on its determination that—while institutional investors “knowingly purchased XRP directly from Ripple” (SA23)—retail investors did not know “if their payments of money went to Ripple” or if “they were buying XRP from Ripple” (SA23-24). But there is no support for a rule that an investor needs to know that she is purchasing from an issuer or its affiliates for the investor to expect profits from the efforts of others. Such a rule would be contrary to the federal securities laws. And a determination that retail investors in particular could not expect profits from Ripple’s efforts without knowing that they were purchasing from Ripple or its affiliates is belied by the undisputed facts of Ripple’s public marketing campaign. Moreover, the need for registration of offers and sales by Larsen and Garlinghouse, control persons of Ripple, was just as acute as for offers and sales by Ripple itself. Cavanagh, 445 F. 3d at 111 n.12 (“A control person, such as an officer, director, or controlling shareholder, is an affiliate of an issuer and is treated as an issuer when there is a distribution of securities.”) (cleaned up).

1. An issuer can lead investors to expect profits from its efforts without the issuer or its affiliates making direct sales to those investors.

Howey does not require that “an investor bought [crypto assets] directly from an issuer … as a necessary element in its test of whether a transaction constitutes an investment contract.” Coinbase, 726 F. Supp. 3d at 293. Rather, Howey is “flexible” and “capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.” 328 U.S. at 299. Yet under the district court’s approach, Howey could easily be evaded by disguising the seller’s identity, routing purchases through an intermediary, or simply offering investments on markets that do not involve face-to-face transactions.

Howey’s expectation-of-profits requirement “makes no … distinction” between purchases from the issuer and those from third parties because the seller’s identity “has no impact on whether a reasonable individual would objectively view the [issuer’s] actions and statements as evincing a promise of profits based on [the issuer’s] efforts.” Terraform, 684 F. Supp. 3d at 197. Rather, the inquiry turns on what investors are “led to expect,” Howey, 328 U.S. at 301, which is determined by the “economic reality,” id. at 298, of “the economic inducements held out to the prospect,” Joiner, 320 U.S. at 353. Because what an investor is led to expect turns on those economic realities and on what the issuer says and does—and not whether the issuer or its affiliate is the seller—an investor can be led to expect profits regardless of the identity of the seller. The district court did not—and could not—reconcile its contrary conclusion with Howey.

Indeed, no other case applying Howey has required that an investor know that she is purchasing from the issuer or its affiliates for the investor to expect profits from the efforts of others. District courts in this circuit and elsewhere have rejected any such requirement and have found that investors who purchase crypto assets on secondary trading platforms—i.e., without knowing the identity of the seller—have an expectation of profits based on the efforts of others. E.g., Terraform, 684 F. Supp. 3d at 197 (expressly “reject[ing] the approach” of this district court as to retail investors); Payward, Inc., 2024 WL 4511499, at *11 (“That a transaction does not involve the asset’s primary issuer does not foreclose the possibility that the primary issuer’s representations follow the asset through to the secondary market.”); Coinbase, 726 F. Supp. 3d at 293 (“[T]he manner of sale has no impact on whether a reasonable individual would objectively view the issuers’ actions and statements as evincing a promise of profits based on their efforts.”) (cleaned up); LBRY, 639 F. Supp. 3d at 217-21 (impersonal sales by an issuer on a trading platform satisfied Howey’s expectation-of-profits requirement).³⁾While in SEC v. Binance Holdings Ltd.,No.23-cv-1599, 2024 WL3225974 (D.D.C. June 28, 2024), the court concluded that the Commission had failed to allege that all trading platform transactions in a particular crypto asset were securities transactions, the court appeared to premise this conclusion on a supposed failure of pleading sufficient facts to establish an expectation of profits in secondary-market purchasers rather than on a requirement that an investor know the identity of the seller. Id. at*22 & n.16. Indeed, the court expressly acknowledged that secondary-market, crypto-asset transactions could, depending on their facts and circumstances, be securities transactions. Id. at *20. The Commission subsequently filed an amended complaint with additional allegations related to trading platform transactions and the defendants’ motion to dismiss the amended complaint is pending.

Purchasers who know the identity of the seller and those who do not are equally dependent on an issuer’s representations of efforts to generate profits. Neither the source of the crypto asset that an investor purchases nor the investor’s lack of knowledge about the identity of the seller determines the economic reality of what is purchased as those facts do not impact what the issuer leads investors to expect. XRP purchased knowingly from Ripple or its affiliates is the same as XRP purchased blindly from Ripple or its affiliates—or from a third party.

2. A requirement that retail investors know that they are purchasing from the issuer or its affiliates undermines the federal securities laws’ protections for offers and sales that issuers make indirectly through intermediaries.

Requiring an investor to know that the seller of an investment contract is the issuer or its affiliate would eviscerate several core provisions of the statutory registration regime. It would also permit unregistered offers and sales of investment contracts made through intermediaries to avoid the reach of the federal securities laws, including their registration and antifraud provisions.

First, requiring the public to know that an offer or sale was made by the issuer would permit issuers to structure otherwise unlawful transactions of unregistered securities through “underwriters” who “purchased from an issuer with a view to, or offers or sells for an issuer in connection with,” a distribution of those securities to the public. 15 U.S.C. §77b(a)(11); see id. §77d(a)(2); see, e.g., Cavanagh, 445 F.3d at 111-16 (affirming summary judgment on Commission’s Section 5 claims for unlawful distribution through underwriters); SEC v. Kern, 425 F.3d 143, 152–53 (2d Cir. 2005) (same). But Congress enacted that broad definition of “underwriter” to prohibit such conduct by “all persons who might operate as conduits for securities being placed into the hands of the investing public.” Thomas Lee Hazen, Treatise on the Law of Securities Regulation § 4:98 (2024 update).

Moreover, an issuer is prohibited from unregistered offers and sales that are “direct[] or indirect[].” 15 U.S.C. § 77e (emphasis added). But if an investor must know that the seller is the issuer or its affiliate for the investor to expect to profit, that prohibition on indirect offers and sales would be rendered meaningless for investment contracts. And a public offering is not limited to the last stage of a distribution in which the security is sold to the public. Rather, liability under Section 5 covers all participants “who are engaged in steps necessary to the distribution of security issues.” Chinese Consol., 120 F.2d at 741.

Second, “offer[s] to sell” unregistered securities are prohibited, 15 U.S.C. § 77e(c), and Congress did not limit offers or “solicitations to personal or individualized ones,” Wildes v. BitConnect Int’l PLC, 25 F.4th 1341, 1345 (11th Cir. 2022 ) (cleaned up). Rather, “a person offers a security every time he makes… a solicitation of an offer to buy…a security for value,” including “communications made through diffuse, publicly available means,” like “social media posts, … online videos, and web links.” Id. at 1345-46 (cleaned up). “A seller cannot dodge liability through his choice of communications—especially when the [Securities] Act covers any means of communication,” and to conclude otherwise would “contradict[] the text and allows easy end-runs around the Act.” Id. at 1346 (cleaned up); see also Diskin v. Lomasney & Co., 452 F.2d 871, 875 (2d Cir. 1971) (offers reached by Section 5 include “oral communication[s]” and “tombstone ad[s]”) (cleaned up); Pino v. Cardone Cap., LLC, 55 F.4th 1253, 1260 (9th Cir. 2022) (“[A]person can solicit a purchase, within the meaning of the Securities Act, by promoting the sale of a security in a mass communication.”). Imposing a requirement for sales that does not exist with respect to offers would incongruously narrow Section 5’s reach when sales are consummated, as opposed to when offers, which “condition[] the public mind,” are made. SEC v. Thomas D. Kienlen Corp., 755 F. Supp. 936, 940 (D. Or. 1991).

Moreover, as Howey explains, “[t]he Securities Act prohibits the offer as well as the sale of unregistered, non-exempt securities.” 328 U.S. at 301. The required registration of an offering is intended to ensure that offerees can “check the accuracy of the information which forms the basis of the offeror’s estimate of value” of securities at the time the offerees are being solicited. Chris-Craft Indus., Inc. v. Bangor Punta Corp., 426 F.2d 569, 574-75 (2d Cir. 1970); see Joiner, 320U.S. at 347 (fraud in solicitations); see also H. R. Rep. No. 73-85, at 7-8 (1933) (explaining that the “waiting period” between registration statement filing and effectiveness “is deliberately intended to interfere with the reckless traditions of the [pre-Securities Act] securities business”). Requiring an investor to know that she is purchasing from the issuer or its affiliates assumes the existence of a particular transaction before there can be an investment contractor liability, which would render Section 5’s prohibition on unregistered offers meaningless. Registration informs(and thus protects) investors before they part with their money, and the Commission is authorized to enjoin illegal offerings even before a purchase is consummated. See, e.g., SEC v. Am. Commodity Exch., Inc., 546 F.2d 1361, 1366 (10th Cir. 1976); see also 15 U.S.C. § 77t.

Third, the federal securities laws use the same term—“investment contract”—to define “security,” 15 U.S.C. §§ 77b(a)(1), 78c(a)(10), when someone “sell[s]” a security, id. §§ 77e(a), and when someone “effect[s] any transaction” in a security on an “exchange,” id.§ 78e. A requirement that an investor know that the seller is the issuer or its affiliate for the investor to have an expectation of profits would thus render unregistered sales of investment contracts conducted over exchanges—which are generally impersonal—beyond the reach of the federal securities laws. See Basic, 485 U.S. at 243–44 (observing that “[t]he modern securities markets,” in which “millions of shares chang[e] hands daily,” “differ from [traditional] face-to-face transactions.”). But the risks of manipulation, fraud, and other abuses that the federal securities laws seek to prevent are not limited to direct sales from the issuer or its affiliates, and the district court’s direct sale requirement would be a green light for fraud on retail investors purchasing investment contracts on secondary markets.

The district court stated that it was “not address[ing] whether secondary market sales of XRP constitute offers and sales of investment contracts because that question[was]not properly before the[c]ourt.”SA23.But its reasoning—that an investor needs to know that she is purchasing from the issuer or its affiliates to expect profits based on the efforts of others—necessarily implicates secondary market offers and sales because secondary market investors generally do not know from whom they are purchasing. And the implications of the district court’s rulings are not limited to investment contracts in which the underlying asset is a crypto asset. Other types of investment contracts—including master limited partnership units—trade in secondary markets in registered transactions at volumes reaching hundreds of billions of dollars. See, e.g., Fan v. StoneMor Partners LP, 927 F.3d 710, 713 & n.1 (3d Cir. 2019); SEC. v. Bergin, No. 13-cv-1940,2015 WL4275509, at *1 (N.D. Tex. Jul. 15, 2015); Guy P. Lander, U.S. Securities Law for International Financial Transactions and Capital Markets § 1:20 (2d ed. 2024 update); see also Gary Plastic, 756 F.2d at 232 (certificate of deposit-related investment contracts traded on secondary market).

The district court’s order declining to certify the summary judgment order for interlocutory appeal similarly states that the summary judgment order “did not hold that offers and sales on a digital asset exchange cannot create a reasonable expectation of profits based on the efforts of others.” JA__[DKT917 at 7]. But that statement overlooks the reasoning of the summary judgment order, including its determination that when the purchaser does not know the identity of the seller, reasonable expectations of profits based on the efforts of others cannot be established “as a matter of law.” SA27. And the order declining to certify interlocutory appeal again emphasized facts relevant to whether retail investors knew if they were purchasing from Ripple or its affiliates—an inquiry that (as discussed) is irrelevant under Howey. See JA__[DKT917 at 7-8].

3. The undisputed facts demonstrate that retail investors expected profits based on Ripple’s efforts regardless of whether they knew that they were purchasing from Ripple or its affiliates.

When Ripple publicly represented that it would undertake efforts to increase the price of XRP, it was promising efforts to increase the price of all XRP, not only XRP knowingly purchased from Ripple or its affiliates.

Ripple’s public marketing campaign involved hundreds of promotional statements published online and through other widely disseminated channels. See supra 10-16. There can be no dispute that Ripple’s representations “reached individuals who purchased [XRP] on [crypto asset trading platforms]—and, indeed, motivated those purchases” whether or not they purchased from (or knew that they were purchasing from) Ripple or its affiliates. Terraform, 684 F. Supp. 3d at 198. In these circumstances, there is “little logic” to drawing a “distinction…between the reasonable expectations of investors who buy directly from an issuer and those who buy on the secondary market” because “[a]n investor selecting an investment opportunity in either setting is attracted by the promises and offers made by issuers to the investing public.” Coinbase, 726 F. Supp. 3d at 293. Because Ripple’s representations “carry forward into the secondary market,” “those representations may be considered.” Payward, 2024 WL 4511499, at *11.

Moreover, the price of XRP, all units of which are fungible, does not depend on from whom it was purchased. See SA2 (“[E]ach unit of XRP…is fungible with any other unit.”). That is, XRP purchased from Ripple or its affiliates has the same market price as XRP purchased from a third party.

Finally, retail investors bought millions of dollars of XRP on trading platforms directly from Ripple, Larsen, and Garlinghouse, and it would make little sense to exempt an issuer from the Securities Act registration requirements simply because retail investors also bought securities on trading platforms from other sellers. “The statutory policy of affording broad protection to investors is not to be thwarted by [such] irrelevant formulae.” Howey, 328 U.S. at 301.

C. The district court erred in distinguishing between what institutional investors and retail investors were led to expect.

In reaching different conclusions regarding the offers and sales of XRP to institutional investors and to retail investors, the district court distinguished between what it found to be the reasonable expectations of each group. But, as already discussed, both groups of investors received representations regarding Ripple’s efforts to increase the price of XRP. In light of this public marketing campaign, both groups of investors were similarly situated, and there is no basis for the district court’s assumption that only institutional investors would have been led to expect profits from Ripple’s efforts. Indeed, that distinction is contrary to Howey’s objective standard, which assesses what the issuer invites a reasonable investor to understand about the proffered investment. It also misunderstands the nature of Commission enforcement actions and misconstrues the facts on which the district court relied.

1. The district court reasoned that “[w]hereas [institutional investors] reasonably expected that Ripple would use the capital it received from its sales to improve the XRP ecosystem and thereby increase the price of XRP, [retail investors] could not reasonably expect the same.” SA23 (cleaned up). The district court speculated that “many” retail investors “may” have purchased XRP expecting profits based not on Ripple’s efforts but on “other factors, such as general cryptocurrency market trends,” “particularly because none of the [retail investors] were aware that they were buying XRP from Ripple.” SA24.

Such speculation is contrary to the settled approach to “determining whether the offering is an investment contract,” in which “courts are to examine the offering from an objective perspective.” Aqua-Sonic, 687 F.2d at 584 (emphasis added); Warfield v. Alaniz, 569 F.3d 1015, 1021 (9th Cir. 2009) (“Under Howey, courts conduct an objective inquiry … based on what the purchasers were led to expect.”) (cleaned up); see also Howey, 328 U.S. at 300-01 (concluding that investors were offered investment contracts even though some investors were not passive investors).⁴⁾That an offer or sale relates to crypto assets does not change the inquiry’s objective nature. See e.g., Zakinov v. Ripple Labs, Inc., No.18-cv-06753, 2023WL 4303644, at *4-5 (N.D. Cal. June 30, 2023) (“Because the Howey test is an objective one … whether XRP is a security will be the same for all class members, regardless of each member’s individual expectations…[and] plaintiff’s status as a day trader will not affect the analysis”); Audet, 605 F. Supp. 3d at 398 n.7 (“Because the Howey test is an objective one…based upon what purchasers were led to expect…the subjective intent of individual plaintiffs in purchasing…is not determinative of the issue of whether…purchasers had a reasonable expectation of profit.”) (cleaned up); Telegram, 448 F. Supp. 3d at 371 (“The inquiry is an objective one focusing on the promises and offers made to investors; it is not a search for the precise motivation of each individual participant.”). And, as discussed above (see supra32-41), whether a reasonable investor expects to profit from an issuer’s efforts does not turn on whether the investor knows that the seller is the issuer or its affiliate.

Moreover, to require the Commission to prove specific investors’ motivation for investing and/or knowledge of the seller would be improper because “the Commission, unlike private parties, need not show reliance in its enforcement actions.” Lorenzo v. SEC, 587 U.S. 71, 84 (2019); see Berko v. SEC, 316 F.2d 137, 143 (2d Cir. 1963) (“The Commission’s duty is to enforce the remedial and preventive terms of the statute in the public interest, and not merely to police those whose plain violations have already caused demonstrable loss or injury.”). Indeed, the district court’s focus on the seller’s identity being known to investors appears rooted in inapplicable private liability concepts, whereas the basis of this enforcement action is a failure to undertake the registration that should have occurred prior to offers and sales.

For the same reasons, the district court’s assertion that some retail investors “were entirely unaware of Ripple’s existence” is unavailing. SA24. To the contrary, it is undisputed that at times Ripple and the market treated “XRP” and “Ripple” as synonymous. See supra 15-16. As Garlinghouse himself explained, “market participants mistakenly conflated Ripple and XRP,” and that conflation persisted even after Ripple tried to address it. JA__[DKT629¶ 917]. And even if certain retail investors were somehow unaware of Ripple’s existence when they purchased XRP, that does not mean that those investors—much less the reasonable investor—were not led to expect profits based upon the efforts of Ripple’s affiliates, agents, and promoters.

2. The district court reasoned that, unlike the offers and sales to institutional investors, those to retail investors “were not made pursuant to contracts that contained lockup provisions, resale restrictions, indemnification clauses, or statements of purpose.” SA24. But while “the existence of…lockups [may] tend to negate the likelihood that a reasonable … [p]urchaser purchased … for consumptive use,” Telegram, 448 F. Supp. 3d at 373, the absence of such provisions from offers and sales to retail investors does not demonstrate that retail investors were not led to expect profits from Ripple’s efforts. Such provisions are generally absent from secondary-market transactions because “resale in the secondary market” is “crucial to the investor” for “realizing profits from capital appreciation.” Gary Plastic, 756 F.2d at 240.

Moreover, Ripple touted the secondary market for XRP and its role in maintaining market liquidity. See supra 13, 15. That “promis[ing] assistance in the liquidation of [investors’] investments” shows that an investment was offered and sold with an expectation of profit. Glen-Arden, 493 F.2d at 1032, 1035; see also Grybniak, 2024 WL4287222, at *11 (statements “regarding the possibility of resale in the secondary market are crucial to the investor with respect to the expectation of realizing profits from capital appreciation”) (cleaned up).

3. The district court reasoned that two of Ripple’s promotional materials—“Ripple Primer” and “Gateways”—“were widely circulated amongst potential [institutional] investors,” “[b]ut[] there is no evidence that these documents were distributed more broadly to the general public.” SA25. Yet those specific promotional materials are just two drops in the ocean that was Ripple’s public marketing campaign, which included hundreds of representations on numerous widely-distributed channels. See supra 10-16.

Critically, courts treat all information reasonably available to investors as informing whether an expectation of profits exists. See Joiner, 320 U.S. at 353 (courts look to the “economic inducements held out” in promotional materials and promoters’ offerings are “judged as being what they were represented to be”); see also supra29.There is no sound explanation for why the district court looked only to those two particular documents in assessing what Ripple was inviting investors to expect. In any event, Ripple repeated every relevant representation that appeared in Ripple Primer or Gateways on widely-distributed channels. See supra 8-9, 10-16.

4. The district court reasoned that there was not “evidence that [retail investors] understood that statements made by Larsen, Schwartz, Garlinghouse, and others were representations of Ripple and its efforts.” SA25. As an initial matter, the Commission need not prove the understanding of any specific investor to demonstrate what an issuer led investors to expect (see supra 44-45) and courts look to all representations made to investors in conducting the expectation-of-profits analysis (see supra 46-47). Moreover, there is no reason to believe that retail investors would not understand such statements as Ripple’s representations. Larsen was Ripple’s co-founder, former CEO, and chairman; Garlinghouse, the self-described “face” of Ripple and its “most important spokesperson,” was its CEO and frequently identified himself as such in his public statements; and Schwartz was Ripple’s chief technology officer and a self-described “well known employee of the company.” See supra 8, 10; JA__, __[DKT629 ¶¶ 23, 43]. And, in any event, the statements by those individuals were only a fraction of the public representations concerning Ripple’s promised efforts to generate profits for XRP investors. See supra 10-16.

5. The district court reasoned—without citing any evidence—that whereas the institutional investors were “sophisticated entities,” the retail investors were “generally less sophisticated as … investor[s],” and “[t]here is no evidence” that they could “parse through…multiple documents and statements,” including “statements (sometimes inconsistent) across many social media platforms and news sites from a variety of Ripple speakers (with different levels of authority) over an extended eight-year period.” SA25. But that Ripple’s public marketing campaign was long, extensive, and varied is no reason to conclude that an investor could not grasp its essential message. And that the marketing campaign was waged in large part on social media platforms and news sites makes it more, not less, accessible to “less sophisticated investors.” Moreover, the district court’s unsupported assumption that retail investors would not “parse” Ripple’s public statements is contrary to the fundamental premise of the federal securities laws’ disclosure-based regime—that investors consume publicly-available information. See Basic, 485 U.S. at 246-49 & n. 29 (describing “impersonal” securities markets as “information-hungry”).

Finally, the district court’s logic turns the protective purpose of the Securities Act on its head. Where investors are dispersed and relatively inexpert, those features make it more, not less, likely that investors expect profits from someone else’s efforts. E.g., Leonard, 529 F.3d at 90 (investors “lacking in requisite expertise, so numerous, or so dispersed…bec[o]me utterly dependent on centralized management”). And “[t]he [Securities] Act does not speak in terms of ‘sophisticated’ as opposed to ‘unsophisticated’ people dealing in securities,” and “[t]he rules when the giants play are the same as when the pygmies enter the market.” Scherk v. Alberto-Culver Co., 417 U.S. 506, 526 (1974) (Douglas, J., dissenting); see also United States v. Schlisser, 168 F. App’x 483, 486 (2d Cir. 2006) (summary order) (“[T]he securities laws protect the gullible and unsophisticated as well as the experienced investor.”) (cleaned up).

II. The district court erred in concluding as a matter of law that there was no investment of money with respect to Ripple’s offers and sales of XRP for non-cash consideration.

The district court’s conclusion that there was no “investment of money” under Howey with respect to Ripple’s offers and sales of XRP for non-cash consideration was like wise in error. Undisputed evidence demonstrates that the recipients provided tangible and definable consideration in return for Ripple’s XRP. Ripple paid XRP to its employees for labor and to its business partners for developing new applications for XRP. See supra 18. On its own financial statements, Ripple valued that labor and services at more than $600 million. See supra 17-18. Even though that consideration did not take the form of cash, it constitutes an “investment of money” under Howey.

The Supreme Court has recognized that an “investment of money” under Howey can include not only cash but also “goods and services” so long as the investor provides “some tangible and definable consideration.” Int’l Bhd. of Teamsters v. Daniel, 439 U.S. 551, 560 & n.12 (1979). Labor is a service that can constitute an investment of money under Howey where, as here, labor is provided in exchange as consideration. See, e.g., Uselton v. Com. Lovelace Motor Freight, Inc., 940 F.2d 564, 574 (10th Cir. 1991) (“[P]laintiffs contributed their legal right to a portion of their wages to [their employer] in return for the right…to participate in [the employer’s] profit-sharing plan”); see Jordan v. Duff & Phelps, Inc., 815 F.2d 429, 437 (7th Cir. 1987) (“The securities acts apply to investment decisions, even those made indirectly or bound up with other decisions, such as employment or entrepreneurship.”). It is likewise an “investment of money” under Howey when non-employee third parties provide computer programming or other “professional services” to a “developing, blockchain-based crypto currency platform” as consideration. Diamond Fortress Techs., Inc. v. EverID, Inc., 274 A.3d 287, 302 (Del. Super. Ct. 2022); see also Frisch v. Likeopedia, LLC, No. 23-cv-3904, 2024 WL 3938345, at *5 (S.D.N.Y. Aug. 26, 2024) (consulting services for social media company).⁵⁾The Supreme Court has accordingly determined that an issuer’s offers and sales of its securities to its employees are not exempt from registration as “not involving any public offering.” See SEC v. Ralston Purina Co.,346 U.S. 119, 122-27 (1953). Rather, registration is required for offers and sales made for “compensatory and incentive purposes.” Registration and Reporting Requirements for Employee Benefits Plans, 55 Fed. Reg. 23909 (June 13, 1990); see17 C.F.R. § 239.16b.

The district court erred when it concluded that “the record shows that recipients…did not pay money or some tangible and definable consideration to Ripple” because they did not provide “capital,” “put up their money” or provide “cash.” SA26 (cleaned up). That legal conclusion directly conflicts with the Supreme Court’s determination that an “investment” under Howey does not need to “take the form of cash only, rather than of goods and services.” Daniel, 439 U.S. at 560 n.12; accord Uselton, 940 F.2d at 574 (“[I]n spite of Howey’s reference to an ‘investment of money,’ it is well established that cash is not the only form of contribution or investment that will create an investment contract,” and “the ‘investment’ may take the form of goods and services.”) (cleaned up).

The district court’s various reasons for erroneously requiring cash consideration—both in the summary judgment order and its order denying certification there of—do not withstand scrutiny. The district court asserted that “the SEC did not identify or explain what tangible and definable employee labor was provided in exchange for XRP.” JA__[DKT917 at 9] (cleaned up). But the Commission identified employment agreements pursuant to which Ripple employees provided their labor in exchange for XRP. See supra 18. The district court similarly reasoned that “Ripple never received the payments” from the business partners to whom it distributed XRP. SA26; see JA__[DKT917 at 8]. But the Commission submitted evidence demonstrating that Ripple received—and recognized—millions of dollars in revenue from those business partners’ efforts to develop new products for Ripple that used XRP. See supra 17-18; SA26 (noting this “consideration other than cash”) (cleaned up). That Ripple “[did] not own the XRP Ledger” (JA__[DKT917 at 9]) is immaterial because Ripple nonetheless derived benefits from, and provided XRP as an incentive for, employees and business partners to increase the value of Ripple’s XRP hoard.

Having erroneously required cash consideration for an “investment of money” under Howey, the district court then failed to appreciate that Ripple used those sales of XRP as a conduit—with the recipients serving as statutory underwriters—to unlawfully disperse XRP to the investing public without the protection of registration. See SA26-27; JA__[DKT917 at 9]. Transactions by an “issuer,” its affiliates, or an “underwriter”—including “any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security,” 15 U.S.C. § 77b(a)(11)—that involve a public offering must be registered. A public offering or distribution “comprises the entire process” by which a “block of securities is dispersed and ultimately comes to rest in the hands of the investing public.” R.A. Holman & Co. v. SEC, 366 F.2d 446, 449 (2d Cir. 1966) (cleaned up), amended on reh’g, 377 F.2d 665 (2d Cir. 1967) (per curiam).

For those receiving XRP as consideration for labor or other services, the XRP did not come to rest with the initial recipients, but rather was dispersed through them as conduits with a view to being resold to the public. Gilligan, Will & Co. v. SEC, 267 F.2d 461, 466-68 (2d Cir. 1959). The public thus “need[ed] the protection of the [Securities] Act” disclosures. See SEC v. Ralston Purina Co., 346 U.S. 119,125 (1953). The undisputed facts accordingly show that through offers and sales of XRP for non-cash consideration, Ripple was an issuer that unlawfully engaged in a public offering of unregistered XRP with its employees and business partners serving as underwriters. See Telegram, 448 F. Supp. 3d at 380-81.

Likewise, Ripple’s offers and sales to institutional investors used those investors as underwriters to unlawfully distribute XRP to the public without registration. See SA22 (rejecting this argument without reasoning). Ripple’s sales contracts made plain that institutional investors’ purpose was to acquire XRP to resell it, including those contracts that priced XRP below its market price to build in an economic incentive for such resales. See, e.g., JA__-__[DKT629 ¶¶ 789-95]); see also Telegram, 448 F. Supp. 3d at 380 (issuer “built economic incentives into [sales,] including large discounts and differential lockups, to ensure that the [institutional purchasers] resold” to the “public at large”). Indeed, Ripple was aware that many of the institutional investors were reselling XRP into the public markets. See, e.g., JA__-__, __-__, __-__[DKT629 ¶¶ 531-34, 567-74, 797, 799, 802-03]. This again demonstrates that the district court drew an erroneous distinction between Ripple’s violative transactions with institutional investors and defendants’ other unregistered offers and sales into the public markets.

***

For the reasons discussed above, Ripple offered and sold XRP as an investment contract, and therefore a security subject to the registration requirements of the federal securities laws. But Ripple never filed a registration statement or demonstrated an applicable exemption from the registration requirements. JA__[DKT629 ¶¶ 928-31]. As a result, defendants’ offers and sales of XRP violated Section 5 of the Securities Act.

Ripple’s failure to register its widespread offers and substantial sales of XRP also deprived XRP investors—especially retail investors—of the disclosures mandated by federal securities laws. Ripple thus denied investors and the market the benefit of those critical safeguards, including important information about not only the benefits but also the risks of investing in XRP. See supra 4-5.

CONCLUSION

The district court erred in concluding that defendants’ offers and sales of XRP to retail investors failed to satisfy Howey’s expectation-of-profits requirement. It also erred in concluding that Ripple’s offers and sales of XRP in exchange for non-cash consideration failed to satisfy Howey’s investment-of-money requirement. The district court expressly did not address whether Howey’s other requirements were met with respect to those offers and sales. SA25, 27. But because the district court found Howey’s other requirements satisfied for Ripple’s offers and sales of XRP to institutional investors, and defendants did not argue that those requirements would differ for offers and sales of XRP to retail investors or for offers and sales of XRP for which Ripple received non-cash consideration, this Court should order summary judgment for the Commission.

Accordingly, this Court should vacate the district court’s final judgment, order summary judgment for the Commission with respect to defendants’ offers and sales of XRP to retail investors and Ripple’s offers and sales of XRP for which Ripple received non-cash consideration, and remand to the district court for further consideration of Larsen’s and Garlinghouse’s aiding and abetting of Ripple’s Section 5violationswith respect to offers and sales to retail investors (seesupra21n.1), and imposition of additional remedies (see supra 25 n.2).

Respectfully submitted,

TRACEY A. HARDIN
Solicitor

JORGE G. TENREIRO
Chief Litigation Counsel

HOPE H. AUGUSTINI
Senior Litigation Counsel

DAVID D. LISITZA
Senior Appellate Counsel

/s/ Ezekiel L. Hill
EZEKIEL L. HILL
Appellate Counsel

Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
(202) 551-7724 (Hill)
hillez@sec.gov

January 15, 2025

CERTIFICATE OF COMPLIANCE

I certify that this brief complies with the type-volume limitation of this Court’s Rule 28.1.1(a) because it contains 12,212 words, excluding the parts exempted by Fed. R. App. P. 32(f).

I also certify that this brief complies with the typeface requirements of Fed. R. App. P. 32(a)(5)(A) and the type-style requirements of Fed. R. App. P. 32(a)(6) because it has been prepared in a proportionally spaced, Roman-style, 14-point type face.

/s/Ezekiel L. Hill
Ezekiel L. Hill

Dated:January 15, 2025