Reported by Allen & Overy LLP – Justin Cooke, Jorge Coronel, Dario de Martino, Todd Fishman, Daniel Guyder, Eugene Ingoglia, Christine Liu, Leland Smith, and Ayyan Zubair

The Order by Judge Torres, while addressing many important questions predominating over the regulation of digital assets, likely raises as many new question as it answers. We believe there will be substantial regulatory debate and further litigation along a number of substantive lines. Here are a few to consider:

1. Who won? In the immediate aftermath, both the SEC and the digital asset industry are claiming success. Market participants and counsel should watch whether either the SEC or Ripple, or both, seek immediately to appeal Judge Torres’ Order to the Second Circuit Court of Appeals in order advance controlling questions of law where there is substantial ground for a difference of opinion.
2. The dividing line between security and no longer a security. The Order appears to demarcate the treatment of tokens depending on whether it is sold pursuant to a formal undertaking or merely distributed through an exchange or a decentralized secondary market. This distinction is crucial when it comes to programmatic sales and other sales. Once the development of the enterprise that is imbedded in the investment contract is either severed from the underlying token or the undertaking has been completed, the Order indicates that it is difficult to continue to characterize the token as a security. Where exactly this line is drawn (the border between “security” to “no longer a security”) is still very murky, but at least superficially, the district court accepted the existence of this line. This theoretical line drawing exercise is integral to the defenses advanced by other defendants in the SEC’s on-going suits in both primary issuances and sales in secondary markets. If the district court’s position that XRP sales to the general public through exchanges and algorithms did not constitute a violation of the securities laws is adopted with respect to secondary market activity, this principle may prove dispositive in claims against digital asset exchanges alleged to have operated unlicensed securities exchanges.
3. Implications for DOJ and SEC enforcement matters: Very clearly the Order will have broad implications for the many DOJ and SEC enforcement actions alleging fraud, manipulation and insider trading in digital asset instruments and markets. We note that as part of the various enforcement actions filed yesterday (July 13) against Celsius and its founder and chief executive officer, the SEC appears to have adopted a more traditional approach in order to establish that the Celsius token is a security. For example, the SEC alleged that Celsius executives “viewed CEL as comparable to stock in a public company” and that the chief executive officer “wrote in an internal message that he wanted ‘to be able to talk about CEL just like public companies talk about their stock.’”
4. Implications for exemptions. Another potential implication of the Order is that if the issuer relies on an available exemption from registration for an initial placement—whether Regulation S for offshore sales to buyers who are not U.S. persons or Section 4(a)(2) of the Securities Act for private placements—then subsequent market sales by the initial token holders may be sales of non-security digital assets. The district court’s distinction between an institutional buyer who directly purchases a token and the programmatic buyer who “stood in the same shoes as a secondary market purchaser who did not know to whom or what it was paying its money” suggests that a buyer of tokens from an initial holder of tokens purchased through a Regulation S or private placement also may not know to whom or what it is paying its money to and deemed not to be holding a security.

Read full report: https://www.jdsupra.com/legalnews/ripple-labs-long-awaited-decision-7799636/