Ripple's Distribution of XRP Did Not Constitute Offer and Sale of Investment Contracts

DISCUSSION

II. Analysis

B. Defendants’ Offers and Sales of XRP

3. Other Distributions

The SEC’s last category of XRP offers and sales are “Other Distributions under written contracts for which [Ripple] recorded $609 million in ‘consideration other than cash’ in its audited financial statements.” SEC Reply at 5. These Other Distributions include distributions to employees as compensation and to third parties as part of Ripple’s Xpring initiative to develop new applications for XRP and the XRP Ledger. SEC Mem. at 31–32. The SEC alleges that “Ripple funded its projects by transferring XRP to third parties and then having them sell the XRP into public markets.” Id. at 31.

The Other Distributions do not satisfy Howey’s first prong that there be an “investment of money” as part of the transaction or scheme. 328 U.S. at 301. Howey requires a showing that the investors “provide[d] the capital,” id. at 300, “put up their money,” Glen-Arden, 493 F.2d at 1034, or “provide[d]” cash, Telegram, 448 F. Supp. 3d at 368–69. “In every case [finding an investment contract] the purchaser gave up some tangible and definable consideration in return for an interest that had substantially the characteristics of a security.” Int’l Bhd. of Teamsters v. Daniel, 439 U.S. 551, 560 (1979). Here, the record shows that recipients of the Other Distributions did not pay money or “some tangible and definable consideration” to Ripple. To the contrary, Ripple paid XRP to these employees and companies. And, as a factual matter, there is no evidence that “Ripple funded its projects by transferring XRP to third parties and then having them sell the XRP,” SEC Mem. at 31, because Ripple never received the payments from these XRP distributions.

In its opposition papers, the SEC pivots and argues instead that the Other Distributions were an indirect public offering because “the parties that received XRP from Ripple, such as an ‘[Xpring] recipient,’ could ‘transfer their XRP (in exchange for units of another currency, goods, or services) to another holder.’” SEC Opp. at 26 (citation omitted). But the SEC does not elsewhere allege that the recipients of these Other Distributions, like Ripple employees and Xpring third-party companies, were Ripple’s underwriters. In any event, the SEC does not develop the argument that these secondary market sales were offers or sales of investment contracts, particularly where the payment of money for these XRP sales never traced back to Ripple, and the Court cannot make such a finding.

Therefore, having considered the economic reality and totality of circumstances, the Court concludes that Ripple’s Other Distributions did not constitute the offer and sale of investment contracts.[18]

[18] Because the Court determines that the record does not establish the first Howey prong as to the Other Distributions, the Court does not reach whether the second or third Howey prongs have been satisfied.