s do not provide ownership interests. If the SEC is going to impute terms into the contracts by which tokens are sold and characterize those contracts as “fund-raising” arrangements, then it is impossible to distinguish financing from operating transactions.The cryptocurrency token is no different from any other object of potential value, such as a painting, the value of which is not dependent on the painter’s financial position or operations: the painter’s financial statements will not show the receipt of payment on theclaims-against-assets side of the painter’s balance sheet, and those financial statements are irrelevant to the value of the painting. So it is with cryptocurrencies, which would explain why they cannot be registered and why “non-compliance” by cryptocurrency producers has nothing to do with the SEC’s “enforcement” of registration requirements on non-securities. Section 6 of the Securities Act, codified at 15 U.S.C. § 77f, describes the registration process. Section 5 (15 U.S.C. § 77e) makes it unlawful to sell unregistered securities, while Section 4 (15 U.S.C. § 77d) provides certain exemptions from the need to register securities.[ii] The SEC’s Division of Corporation Finance administers the registration process. Registration refers to the specific units of the security to be offered and sold, not to the class of security, which can or must be registered under the Securities Exchange Act of 1934. There is one exception to this, which involved an enforcement action and which we discuss later in this article. If the company is a business corporation, the corporation owns the assets and the shareholders own the corporation. If the corporation is in bankruptcy or receivership or is dissolved, the claims against the assets are no longer intermediated by the corporation. When a company buys another company’s or governmental securities, they are not financing transactions and the securities appear as assets on the left side of the balance sheet. A transaction is a set

ctions and required the Institutional Buyers to indemnify Ripple for claims resulting from selling or distributing XRP. Ripple raised approximately $758 million from Programmatic Sales through blind bid/ask transactions—XRP was sold on digital asset exchanges and neither party knew who was selling or buying the XRP. Further, Ripple allegedly raised approximately $609 million in value from Other Distributions which were distributions of XRP in the forms of grants, charitable giving, and employee rewards. Ripple’s co-founder, Chris Larsen, and Ripple’s CEO, Brad Garlinghouse, each allegedly sold XRP via Programmatic Sales and earned a combined $600 million. Throughout this time, Ripple did not file any registration or financial statements or periodic reports with the SEC.Case Background In 2020, the SEC filed a lawsuit against Ripple, Larsen, and Garlinghouse alleging that the sale of XRP was an unregistered security offering in violation of Sections 5(a) and 5(c) of the Securities Act (15 U.S.C. §§ 77e(a) and 77e(c)).In its motion for summary judgment, the SEC alleged that selling XRP qualified as an “investment contract” under securities law. The SEC advanced an “embodiment” theory in which the token itself embodied the securities transaction it was allegedly being sold under. The SEC supported their assertions, among other things, by citing Ripple’s marketing promises to increase the value of XRP for the benefit of XRP owners and for Ripple, and by pointing to the economic expectations XRP purchasers had for Ripple to increase XRP’s value.In response, Defendants countered in their own motion for summary judgment that XRP transactions did not constitute investment contracts, claiming that the transactions did not have the “essential ingredients” of an investment contract. Defendants also focused on the Blue-Sky laws from which the term “investment contract” originated to support their defense that there are certain essential elements of every investment contract such as privity of con

ll transactions publicly). Ripple Labs then transferred 80 billion XRP to itself and 9 billion to Larsen as compensation. Garlinghouse joined Ripple in 2015, and subsequently received at least 357 million XRP from Ripple as compensation.The SEC claims that from 2013 to the present, Garlinghouse and Larsen offered or sold a portion of their individual holdings of XRP to the public in exchange for hundreds of millions of dollars (1.7 billion XRP netting $450 million for Larsen and his wife; 375 million XRP netting $159 million for Garlinghouse).Although this lawsuit does not involve NFTs, if a decision is ultimately rendered we may have legal precedent regarding whether NFTs are considered “securities” under the federal securities laws.Sections 5(a) and 5(c) of the Securities Act require that whenever an issuer of securities, its control persons, or affiliates offers or sells securities to the public, those securities must first be registered with the SEC, absent certain exemptions. See 15 U.S.C. §§ 77e(a), 77e(c). The SEC claims that XRP is an investment contract, and therefore a security. Accordingly, the SEC claims that Garlinghouse and Larsen violated Section 5 by offering and selling their XRP into the public market without first registering those offers and sales, and that they aided and abetted Ripple’s violations as well.To prevail, the SEC will need to show that XRP is an investment contract under the Howey test. See SEC v. W.J. Howey Co., 328 U.S. 293, 298–99 (1946) (holding that an “investment contract . . . means 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 a promoter or a third party. . .”). In order to prove its allegations that Garlinghouse and Larsen aided and abetted Ripple in offering or selling unregistered securities, the SEC must show that they knew or recklessly disregarded that Ripple’s offerings and sales of XRP required registration as securities and that those

[12] [1] SEC Press Release, ‘SEC Exposes Two Initial Coin Offerings Purportedly Backed by Real Estate and Diamonds’, (September 29, 2017), available at: https://www.sec.gov/news/press-release/2017-185-0 and Securities and Exchange Commission against Recoin Group Foundation, LLC, DRC World Inc. a/k/a Diamond Reserve Club, and Maksim Zaslavskiy Complain (United States District Court Eastern District of New York), (the Complaint) available at: https://www.sec.gov/litigation/complaints/2017/comp-pr2017-185.pdf [2] SEC Press Release, ‘SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities’, (July 25, 2017) (the DAO Report), available at: https://www.sec.gov/news/press-release/2017-131 15Section 17(a)(1)-(3) of the Securities Act, 15 U.S.C. § 77q(a)(1)-(3); Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act), 15 U.S.C. § 78j(b); Rule 10b-5(a)-(c), 17 C.F.R. § 240.10b-5(a)-(c). [4] Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C. §§ 77e(a), 77e(c). [5] The Complaint, paragraphs 13, 14.

, including by starting on decentralized exchanges; or (iii) airdropped.While this is a major ruling, it is not binding on other district courts, even those in the Southern District of New York. Other courts could disagree with its holdings, as well as the decision in other cases, such as Telegram and Kik, and it is unknown to what extent the Second Circuit will uphold the decision on the likely appeal by all parties.I. BackgroundRipple is a privately held payments technology company that uses blockchain technology to enable the efficient transmission of money. XRP is the native token (aka “digital asset” or “cryptocurrency”) on the Ripple blockchain. In December 2020, the SEC sued Ripple, Garlinghouse, and Larsen (collectively, “Defendants”), alleging that (1) Defendants’ sales of XRP were unregistered offers and sales of securities (that were not conducted pursuant to an exemption from registration) and, therefore, violated Section 5 of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. §§ 77e(a) and (c); and (2) Garlinghouse and Larsen aided and abetted Ripple’s Section 5 violations. The SEC’s case was based on the allegation that XRP is a security, specifically, an investment contract, and, therefore, subject to federal securities laws that require sales to be registered or offered and sold pursuant to an exemption from registration.In September 2022, after the completion of fact and expert discovery, all parties moved for summary judgment on whether the sales of XRP constituted the unregistered sale of a security. The SEC also moved for summary judgment (1) on its aiding and abetting claim against Larsen and Garlinghouse, and (2) against Defendants’ affirmative “fair notice defense,” which asserted that the SEC’s actions violated their due process rights.II. The Court’s DecisionA. Section 5 Liability: Howey Test Explained and AppliedIn determining whether Defendants’ sale of XRP violated Section 5, the Court repeatedly distinguished the investment contract (which is a “cont

S’ findings of deficiencies in the company’s Bank Secrecy Act/Anti-Money Laundering compliance, the platform agreed to pay a fine of $50million, committed to spend $50million to improve these Know-Your-Customer systems, and consent to the installation of a monitor. Although the Dapper Labs court ruled in favor of the putative investor class at this early stage, plaintiffs will now have to demonstrate all the elements of their claim, including meeting the requirements to certify their putative class.We expect the S.E.C., other regulators, and the courts to continue to develop the body of guidance on how federal and state regulations apply to digital assets. As the Dapper Labs court reminded issuers:“[E]mbrac[ing] a new technology – NFTs – does not change the underlying legal analysis.” For prospective investors, NFTs and other digital assets will likely remain a class that requires significant due diligence.Friel v. Dapper Labs, Inc., Dkt. No. 1:21-cv-05837-VM (S.D.N.Y.) (the “Action”).15 U.S.C. § 77e. The Action also names Roham Gharegozlou, Dapper Labs’ Chief Executive Officer, as a defendant, asserting control person liability pursuant to Section 12(a)(1). 15 U.S.C. §77l. Friel, Dkt. No. 1:21-cv-05837-VM, slip op. at 20.Framework for “Investment Contract” Analysis of Digital Assets, Secs. & Exch’g Comm’n, Apr. 3, 2019, available at https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets.328 U.S. 293 at 298-99.See n.4 supra.Friel, slip op. at 21-22.Id. at 36-37.In the Matter of Kimberly Kardashian, Admin. Proc. File No. 3-21197 (S.E.C. Oct. 3, 2022), available at https://www.sec.gov/litigation/admin/2022/33-11116.pdf.In the Matter of Paul Anthony Pierce, Admin. Proc. File No. 3-21305 (S.E.C. Feb. 17, 2023), available at https://www.sec.gov/litigation/admin/2023/33-11157.pdf.https://www.coinbase.com/price/ethereummax.See Paul Grewal, The SEC Has Told Us It Wants to Sue Us Over Lend. We Don’t Know Why., Coinbase, Sept. 7, 2021, available athttps://www.coin

SEC or Congressional action. In the meantime, however, actors in the crypto space should be cautious about their behaviors and business models, and they would be wise to consult closely with counsel on what the law may or may not require of them.1Press Release, Sec. & Exch. Comm’n, Kraken to Discontinue Unregistered Offer and Sale of Crypto Asset Staking-As-A-Service Program and Pay $30 Million to Settle SEC Charges (Feb. 9, 2023), https://www.sec.gov/news/press-release/2023-25.2Complaint and Demand for Jury Trial at 5-6, Securities and Exchange Commission v. Payward Ventures, Inc. and Payward Trading, Ltd., No. 23-cv-588 (N.D. Cal. Feb. 9, 2023).3Id. at 10.4SeeWhat is staking?, Coinbase, https://www.coinbase.com/learn/crypto-basics/what-is-staking. (last visited Feb. 27, 2023).5See Benjamin Curry and Farran Powell, Best Crypto Staking Platforms of 2023, Forbes Advisor (Feb. 9, 2023, 7:12 PM), https://www.forbes.com/advisor/investing/cryptocurrency/best-crypto-staking-platforms/.6See 15 U.S.C. §§ 77e(a), (c).7Complaint, supra note 2, at 3.8Press Release, supra note 1.9Id.10Id.11Hester M. Peirce, Commissioner, Sec. & Exch. Comm’n, Public Statement, Kraken Down: Statement on SEC v. Payward Ventures, Inc., et al. (Feb. 9, 2023), https://www.sec.gov/news/statement/peirce-statement-kraken-020923.12Id.13Hester M. Peirce, Commissioner, Sec. & Exch. Comm’n, Speech, Outdated: Remarks before the Digital Assets at Duke Conference (Jan. 20, 2023), https://www.sec.gov/news/speech/peirce-remarks-duke-conference-012023.14Id.15Peirce, supra note 11.

The complaint further alleges that Defendant Robert applied for, but did not secure, a $100,000 business loan with a lender in an attempt to cover the shortfall in January of 2021. Thereafter, the Scheme collapsed in early 2021.The complaint seeks permanent injunctive relief and disgorgement of ill-gotten gains and asserts seven claims of relief against Defendants for violations of: (i) Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C. § 77e; (ii) Section 17(a)(1) of the Securities Act, 15 U.S.C. § 77q(a)(1); (iii) Section 17(a)(2) of the Securities Act, 15 U.S.C. § 77q(a)(2); (iv) Section 17(a)(3) of the Securities Act, 15 U.S.C. § 77q(a)(3); (v) Section 10(b) and Rule 10b-5(a) of the Securities Exchange Act, 15 U.S.C. § 78j(b); (vi) Section 10(b) and Rule 10b-5(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b); 10b-5(b); and (vii) Section 10(b) and Rule 10b-5(c) of the Securities Exchange Act, 15 U.S.C. § 78j(b); 10b-5(c).

Section 5 5regulates the timeline and distribution process for issuers who offer securities for sale. 15 U.S. Code § 77e. https://www.skadden.com/insights/publications/2021/09/quarterly-insights/cryptocurrency-regulation-and-enforcement-at-the-us-federal-and-state-levels https://asc.alabama.gov/Orders/2021/SC-2021-0012.pdf

As courts consider the matter, judicial philosophy will loom large: will courts narrowly construe the statutory text and strictly apply precedent, or be swayed by policy implications, including a perceived weakening of the protections of the securities laws that could result from their ruling? Only time will tell.1 13 F.4th 940 (9th Cir. 2021).2 NYSE Listed Company Manual § 102.01B n. E (2021).3 15 U.S.C. § 77e(c).4See Order Granting Accelerated Approval of NYSE Proposed Rule Change Relating to Listing of Companies, Exchange Act Release No. 34-82627, 83 Fed. Reg. 5650, 5653-54 (Feb. 2, 2018).5 NYSE Listed Company Manual § 102.01B n. E. The SEC approved a second amendment to Section 102.01B in 2020, allowing the company, in addition to pre-existing shareholders, to sell shares to the public in a direct listing.