In a stunning turn of events, a federal judge ruled that the Ripple Labs token (XRP) is deemed a security when sold to sophisticated investors, but not a security when sold to the general public.

This is a classic example of a tortured compromise, which basically means each side gets a win and suffers a loss. For the SEC - the win is that the court agreed with the SEC's long-standing argument that the sale of the token met the Howey Test definition of an “investment contract” under federal securities laws and was de facto a security. 

Under Howey, an investment contract exists if there is an “investment of money in a common enterprise with reasonable expectation of profits to be derived from the efforts of others.”

According to the federal judge, “Institutional Buyers would have understood that Ripple was pitching a speculative value proposition for XRP with potential profits to be derived from Ripple’s entrepreneurial and managerial efforts.” 

However, the major loss for the SEC and win for Ripple (and, by extension, Coinbase and other marketplaces wishing to trade XRP), is that the judge found that this logic does not apply to programmatic investors, meaning the broader public, as there was no evidence that such investors could parse the many statements made by Ripple about XRP. The result being when John Q Public is looking to buy the Ripple token, they are not capable of making the types of determinations required for it to be deemed an investment contract.

So what will be the outcome of this bifurcated decision? The double standard created by this compromise, leaves this author shocked and bewildered. The federal securities laws were created in 1933 and 1934 in great part to address the calamity created by the Stock Market Crash of 1929 and the ensuing Great Depression. They provide a comprehensive framework for the issuance of securities in private and public sales; full and fair public disclosure, regulation of trading markets and their intermediaries and protection of investors from fraud and the like.

With the stroke of the pen, the court has determined that, as it relates to the purchase of the Ripple token, only sophisticated institutional investors have access to these federal securities laws. Everyone else must fend for themselves in an environment where no current regulation exists.