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Crypto Law/Level III · Tokens and securities law/3.1 The Howey test/Lesson 7

Ripple: institutional sales and exchange sales

Why one court found Ripple’s direct sales of XRP to institutions were investment contracts but its anonymous exchange sales were not, and how the case finally ended in 2025.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. For buyers, the cheapest route is anonymous secondary purchase: a blind exchange buyer ‘stood in the same shoes as a secondary market purchaser’ (SEC v. Ripple, S.D.N.Y. 2023). The catch: one district court ruling binds no other court, and gains remain taxable.
  2. Issuers selling directly to known institutions under contract should use an exemption such as Rule 506(b) or 506(c) and file the free Form D within 15 days of first sale; Ripple’s $728.9 million of institutional sales without one produced a $125,035,150 penalty.
  3. Paying employees and partners in tokens failed Howey’s investment-of-money element in Ripple; the catch is that the value is taxable compensation and recipients’ quick resales into the market can draw scrutiny.
  4. Record each sale’s channel, whether the parties knew each other, contract terms and lockups. The SEC’s March 2026 interpretation lists XRP as a digital commodity and says non-security assets do not carry investment contracts into blind secondary trades, an agency view courts may revisit.

MaterialsThe July 13, 2023 opinion in SEC v. Ripple Labs, Inc., No. 20 Civ. 10832 (S.D.N.Y.)SEC Litigation Releases No. 26306 (May 8, 2025) and No. 26369 (August 7, 2025)SEC Release No. 33-11412 (March 17, 2026), footnote 51 on digital commoditiesFor any token sale you study, a record of the sales channel, counterparty, contract terms and lockups

Wonder

  1. How can the same token be part of an investment contract in one sale and not in another?
  2. Did the Ripple ruling decide that all exchange trading in tokens is outside securities law?
  3. What did Ripple finally have to pay?

Explore

  1. The SEC sued Ripple Labs, Inc. and its executives Bradley Garlinghouse and Christian Larsen in the Southern District of New York on December 22, 2020, alleging unregistered offers and sales of XRP. On July 13, 2023 Judge Analisa Torres ruled on summary judgment, the stage where a judge decides issues on undisputed facts without a trial. She held that ‘XRP, as a digital token, is not in and of itself’ an investment contract, and analysed each type of sale separately. She also rejected the defendants’ proposed test, which would have required a contract, post-sale obligations and a right to share in profits.
  2. The record described three categories. Institutional Sales were direct sales under written contracts to institutional buyers, hedge funds and others, for about $728.9 million. Programmatic Sales were sales on digital-asset exchanges through trading algorithms, for about $757.6 million. Other Distributions were XRP given as payment, such as to employees, for which Ripple recorded about $609 million in non-cash consideration. Separately, the SEC alleged that Larsen and Garlinghouse sold at least $450 million and $150 million of XRP respectively. The court applied the three Howey elements (lessons 3.1.2 to 3.1.4) to each category.
  3. The Institutional Sales were investment contracts. The buyers paid money; Ripple pooled the proceeds and every buyer got the same fungible XRP, creating a common enterprise; and Ripple’s marketing led sophisticated buyers to expect Ripple to use the money to build uses for XRP and raise its value. Some contracts carried lockups or resale limits tied to trading volume, which the court found inconsistent with buying XRP as a currency. The court rejected the defendants’ ‘fair notice’ defense for these sales, holding that Howey and the cases applying it supplied the necessary notice.
  4. The Programmatic Sales were not. They were ‘blind bid/ask’ trades: Ripple did not know who was buying, and buyers did not know they were buying from Ripple. Since 2017 these sales were under 1% of global XRP trading volume, so most exchange buyers never paid Ripple at all. A programmatic buyer, the court said, ‘stood in the same shoes as a secondary market purchaser’. Speculative motive alone was not enough. The executives’ exchange sales failed for the same reason, and the Other Distributions failed the investment-of-money element. In a footnote, the court expressly left open whether secondary-market sales by others are securities transactions.
  5. The SEC dismissed its remaining claims against the executives in 2023. A final judgment on August 7, 2024 imposed a $125,035,150 civil penalty on Ripple and an injunction against further registration violations, and both sides appealed to the Second Circuit. On May 8, 2025 they filed a settlement asking the district court to dissolve the injunction and reduce the penalty paid to the SEC to $50 million. On June 26, 2025 the court denied that request, finding no exceptional circumstances to alter the judgment. On August 7, 2025 the parties dismissed their appeals, leaving the final judgment, penalty and injunction in effect.
  6. Because the appeals were dropped, no appellate court ruled on the institutional-versus-exchange distinction, and a district court opinion does not bind other courts. The SEC’s March 2026 interpretation now lists XRP among ‘digital commodities’ that are not themselves securities, and says a non-security asset does not carry an investment contract into secondary trades where buyers would not reasonably expect the issuer’s promises to follow it (lesson 3.1.4). That is the agency’s view, not a ruling. A practical check: for each sale of a token, record the channel, whether buyer and seller knew each other, the contract terms and any lockups.

Key facts

  • The SEC filed SEC v. Ripple Labs, Inc. in the Southern District of New York on December 22, 2020.
  • On July 13, 2023 Judge Analisa Torres held that Ripple’s Institutional Sales of about $728.9 million of XRP were unregistered offers and sales of investment contracts.
  • The same opinion held that Ripple’s Programmatic Sales on exchanges, about $757.6 million, did not satisfy Howey’s expectation-of-profit element.
  • The August 7, 2024 final judgment imposed a $125,035,150 civil penalty on Ripple and an injunction against further Securities Act registration violations.
  • On June 26, 2025 the district court denied the parties’ request to dissolve the injunction and reduce the penalty paid to the SEC to $50 million.
  • On August 7, 2025 the SEC and Ripple dismissed their cross-appeals, leaving the 2024 final judgment in effect.

Exercise nine, six, three, one

9CollectList up to 9 sales or transfers of a single token you know, noting for each the seller, the buyer if known, the channel, the price terms and any lockup.
6ClusterSort them into 6 groups: direct contract sales to institutions, direct sales to individuals, anonymous exchange sales by the issuer, exchange sales by insiders, transfers as payment, and resales between third parties.
3DistillReduce the 6 groups to 3, following the Ripple court: sales like the Institutional Sales, sales like the Programmatic Sales, and transfers with no investment of money.
1CrystallizeWrite 1 sentence explaining why the Ripple court said a blind exchange buyer was not relying on Ripple’s efforts in the way an institutional buyer was.

Fact check

Dates, figures and claims checked against the published sources listed below.

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