The SEC suffered a significant loss last week in its ongoing legal battle with Ripple over the XRP digital token. While the District Court held that Ripple’s initial sales of XRP to institutional investors constituted the sale of unregistered securities, it was a Pyrrhic victory as the court held that all other ways in which Ripple sold or distributed XRP did not involve the sale of unregistered securities. In particular, the court held that Ripple’s program to sell XRP to public buyers on digital asset exchanges, as well as its distribution of XRP as compensation to employees and third parties, did not constitute the offer or sale of securities. The court also rejected the SEC’s arguments that Ripple used the institutional buyers as underwriters to sell XRP to the public. The opinion, if followed by other courts in pending litigation with the SEC, could have a far-reaching impact on the cryptocurrency markets, especially with respect to secondary market crypto trades on digital asset exchanges.
The Crypto Wars Escalate
The gloves are off. The SEC’s recent enforcement actions against leading crypto exchanges suggest that the SEC has decided that time’s up for the crypto industry as it currently exists in the United States.
After spending years urging industry participants to come in and register, the SEC has made clear, by going after some of the biggest players in the space, that it does not intend to tolerate exchange operators’ offering of unregistered crypto trading in the United States, at least as to retail investors where the tokens are securities. From the SEC’s perspective, most crypto tokens are securities, so, if a company wants to provide the securities-like infrastructure to trade those tokens, it must be registered with the SEC – whether as an exchange (matching buyers and sellers), a broker-dealer (trading crypto on behalf of others), or a clearing agency (facilitating trade settlement).
SEC Issues Largest Whistleblower Bounty Award Ever To One Individual
As we reported here, on May 5, 2023, the SEC issued an award of $279 million to a whistleblower. This is the largest award the SEC has issued to an individual whistleblower in the history of the SEC Office of the Whistleblower’s program.
Fraud Claims Against Token Issuer Dismissed Based on Disclosures to Accredited Investor
The organizers of an initial coin offering (ICO) recently won dismissal of an investor’s fraud claims by establishing that their public risk disclosures negated the investor’s claims of reliance on alleged misstatements. The project, a video service provider’s ICO, was governed by a purchase agreement called a “Simple Agreement for
District Court Declines to Dismiss NFT “Insider Trading” Indictment against Former OpenSea Employee
In late October, a New York district court refused to dismiss the Department of Justice’s (DOJ) indictment against defendant Nathaniel Chastain, who was charged with wire fraud and money laundering relating to his using insider knowledge to purchase non-fungible tokens (NFTs) prior to them being featured on OpenSea, an online
Keeping Up With Kim Kardashian’s SEC Charges
The SEC spread its reach to Hollywood this month – on October 3, 2022, the SEC announced charges against Kim Kardashian for her social media promotions of EMAX, a digital token issued by EthereumMax. The SEC found that Kardashian violated the anti-touting provision of the federal securities laws by failing to disclose the $250,000 payment she received for the ad.
CFTC Head Urges Congressional Action on Crypto while SEC Leader Says Crypto Rulemaking is “Years Away”
Both the head of the Commodity Futures Trading Commission (CFTC) and leader of the SEC agree that the crypto markets need regulating, and specific rules may help clarify which agency has authority to regulate various cryptocurrency activities. The client alert below discusses both CFTC Chairman Rostin Behnam’s comments and SEC
Fifth Circuit Holds SEC’s In-House Courts and Judges Unconstitutional
In Jarkesy v. Securities and Exchange Commission, the Court of Appeals for the Fifth Circuit issued a remarkable opinion holding numerous aspects of the SEC’s administrative enforcement regime are unconstitutional. The May 18, 2022 ruling stands to eliminate the SEC’s ability to adjudicate enforcement actions seeking penalties using ALJs, rather than bringing suit in federal district court. It also could tee up further argument at the Supreme Court to resolve the scope of the SEC’s – and, perhaps, other administrative bodies’ – adjudicatory powers.