Ripple Files Notice of Cross-Appeal to Challenge SEC

The company behind the XRP cryptocurrency disclosed in its filing in the US District Court for the Southern District of New York that it plans to cross-appeal in the SEC case to the higher court, namely the Court of Appeals for the Second Circuit. The notice is a necessary procedural step to alert the court and the other party that the filer plans to appeal part of the court’s ruling.

For those unfamiliar with legalese, a cross-appeal is a request to the higher court to hear the case but it differs slightly from a standard appeal because it is filed in response to the opposing party’s appeal. In this case, both Ripple and SEC are appealing the lower court’s ruling made by Judge Analisa Torres, a District Judge for the Southern District of New York. The appeals will be heard by the Court of Appeals for the Second Circuit, one of the thirteen federal appellate courts that review cases decided by the district courts. 

“Today, Ripple filed a cross-appeal to ensure nothing’s left on the table, including the argument that there can’t be an ‘investment contract’ without there being essential rights and obligations found in a contract,” said Stuart Alderoty, Ripple’s chief legal officer in a post on Twitter/X.

According to Alderoty, the SEC isn’t going to appeal the ruling that XRP isn’t security. Ripple’s CLO even mentioned that the agency has apologized for suggesting that the token was a security in the first place. 

Alderoty believes that the SEC may try to appeal the ruling that Ripple’s programmatic XRP sales and other distributions weren’t securities, but asserts that the regulator will lose on this issue again. 

The US Securities and Exchange Commission sued Ripple Labs in 2020, accusing the company of raising $1.3 billion through the sale of its token XRP, which it claimed was an unregistered security. The agency has also sued Ripple’s CEO Brad Garlinghouse and co-founder Christian Larsen.

In August 2024, Judge Analisa Torres made a split decision, ruling that direct institutional sales of XRP could qualify as unregistered securities offerings, but not programmatic sales and other distributions, such as those made to reward employees and developers. The reasoning behind ruling in favor of Ripple for programmatic sales was that retail investors didn’t know whether they were purchasing XRP from Ripple or another seller, so they had no reasonable expectations of profits derived from the company’s efforts, which is a key component to the Howey test. 

Judge Torres also ordered Ripple Labs to pay $125 million in fines calculated based on the funds raised from the direct institutional sales of XRP. Although a penalty may seem hefty, it’s a far cry from the $2 billion the SEC had been pushing for.

The Howey Test is a legal framework based on the landmark 1946 case that is used to determine whether a transaction qualifies as an “investment contract” and therefore should be regulated as a security under U.S. securities law. For a transaction to be considered such a contract, it has to meet the four criteria, which are an investment of money, expectation of profits, common enterprise, and reliance on the efforts of others.