August 02, 2023

Ripple is Not a Tidal Wave – the SEC’s Case Against Terraform Labs Provides a Quick Counterpoint to the Recent Ripple Ruling


Just weeks after the novel securities analysis in SEC v. Ripple Labs was handed down by Judge Analisa Torres (which we covered in our Legal Update), a different judge in the Southern District of New York has distinguished the approach taken in Ripple and argued against its policy outcomes in another, high-profile enforcement action by the SEC involving digital assets.

In that case—SEC v. Terraform Labs—Judge Jed Rakoff ruled this week in favor of the SEC on a motion to dismiss, finding the SEC’s amended complaint adequately pled that the crypto assets sold by Terraform Labs and its founder and Chief Executive Officer Do Keyong Kwon qualify as “investment contracts” under the Howey precedent.1 While this decision represents only a preliminary review of the issues and accepts the SEC’s allegations as true (for purposes of the motion), it provides useful commentary as well as some counterpoints to the Ripple analysis, including the following:

  • The part of the decision certain to attract the most attention is Judge Rakoff’s explicit rejection of the approach used by Judge Torres in the recent Ripple ruling, which drew a distinction between digital assets based on the manner in which they were sold (primary issuance to institutional investors vs. secondary transactions involving retail investors). In doing so, Judge Rakoff stated that the Howey precedent does not differentiate among purchasers, because the manner in which digital assets are purchased would not change a purchaser’s reasonable belief in the promise of future profits. In the Terraform case, the SEC alleged that the defendants actively encouraged both retail and institutional investors to buy crypto assets while touting their ability to maximize returns on investors’ tokens.2
  • Judge Rakoff appeared to agree with Judge Torres that digital assets do not constitute securities unless their offering, sale or use were tied to an economic benefit being conveyed upon the purchaser.3 However, Judge Rakoff also stated that a crypto asset that is not a security at one point in time may, as its circumstances and those of its related protocol(s) change, become an investment contract—i.e., a security—that is subject to SEC regulation.4
  • Judge Rakoff’s decision acknowledges that stablecoins – when designed to maintain a constant value in relation to another asset and intended for use as a stable store of value – may not qualify as investment contracts because they would theoretically not generate profits through a common enterprise.5
  • However, the SEC’s amended complaint included legally adequate allegations, sufficient to defeat the motion to dismiss, on two key points:
    • The non-stablecoin crypto assets in this case—LUNA, wLUNA, the mAssets and MIR—were investment contracts because they were touted as providing yield to holders in line with the growth of the ecosystem; and
    • The stablecoin crypto assets in this case—UST —were investment contracts because they conferred a right to purchase another security (the LUNA tokens) and because nearly 75% of the tokens were deposited in an investment pool promising returns of up to 20%.6


The Terraform decision underscores that there are many ongoing enforcement actions alleging that the sale or trading of certain digital assets constitutes a violation of US federal securities laws and other US laws. Neither decision—in the Ripple case or the Terraform case—binds other courts that are examining similar sets of facts, and neither decision will be the final chapter in the dispute over these issues.



1 SEC v. Terraform Labs Pte. Ltd., No. 23-CV-1346, July 31, 2023 Opinion and Order (Docket No. 51), at 3-4. The crypto assets in question include the “stablecoin” Terra USD as well as other tokens such as LUNA, wLUNA, mAssets and MIR. A copy of the Court’s order can be accessed at: 

2 Id. at 40-42.

3 In full, the Court suggested that “[m]uch as the orange groves in Howey would not be considered securities if they were sold apart from the cultivator’s promise to share any profits derived by their cultivation, the term ‘security’ also cannot be used to describe any crypto-assets that were not somehow intermingled with one of the investment ‘protocols,’ did not confer a ‘right to … purchase’ another security, or were otherwise not tied to the growth of the Terraform blockchain ecosystem.” Id. at 33.

4 Id. at 32.

5 Id. at 33.

6 Id. at 34, 40.

Stay Up To Date With Our Insights

See how we use a multidisciplinary, integrated approach to meet our clients' needs.