To Be Or Not To Be . . . A Security: Takeaways From The Ripple Labs Ruling

The most important part of today's ruling in the SEC v. Ripple Labs: Ripple's XRP token is not de facto a security. Let's not take that for granted. It is a widely held belief that tokens issued by companies to raise money for operations are securities. A federal court in New York says not so fast.

According to the court:

1. The tokens are securities if sold directly to institutional buyers.
2. The tokens are not securities if sold in programmatic blind sales or used to compensate employees and third parties.

The apparent distinction is that the institutional buyers reasonably expected Ripple would use the capital it received from sales to improve the XRP ecosystem and thereby increase its price. This meets the third prong of the Howey test (namely, whether the economic reality surrounding the sale led buyers to have "a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others").