SEC v. Ripple: In 2012, Law Firm Perkins Coie Categorized XRP Tokens as Securities

BACKGROUND

I. Factual Background

D. Defendants’ Receipt of Legal Advice About XRP Offers and Sales

In February 2012, before the XRP Ledger was publicly launched, Ripple’s founders, including Larsen, received from the Perkins Coie LLP law firm a memorandum, which sought to “review the proposed product and business structure, analyze the legal risks associated with [Ripple], and recommend steps to mitigate these risks.” Defs. 56.1 Resp. ¶ 986; see ECF No. 846-29 at 4. The memorandum analyzes, among other things, the legal risks associated with selling XRP. Defs. 56.1 Resp. ¶ 986. Specifically, it states that “[i]f sold to [i]nvestors, [XRP tokens] are likely to be securities,” and “[t]o the extent that [the founders’] issuance of [XRP] does not involve an investment of money, there is a low risk that [XRP] will be considered an investment contract.” Id. ¶¶ 986, 989; see ECF No. 846-29 at 5, 12.

In October 2012, Ripple, Larsen, and others received another memorandum from Perkins Coie which sought to “review the proposed features of the Ripple [n]etwork and [XRP] and to provide recommendations for mitigating relevant legal risks.” Defs. 56.1 Resp. ¶ 987; see ECF No. 846-30 at 3. That memorandum states that “[a]lthough we believe that a compelling argument can be made that [XRP tokens] do not constitute ‘securities’ under federal securities laws, given the lack of applicable case law, we believe that there is some risk, albeit small, that the [SEC] disagrees with our analysis.” Defs. 56.1 Resp. ¶ 993; see ECF No. 846-30 at 6. The memorandum further states that, “[t]he more that [the founders and Ripple] promote [XRP] as an investment opportunity, the more likely it is that the SEC will take action and argue that [XRP tokens] are ‘investment contracts.’” Defs. 56.1 Resp. ¶ 993; see ECF No. 846-30 at 6.

Larsen reviewed both the February and the October 2012 memoranda and discussed them with Perkins Coie attorneys. Defs. 56.1 Resp. ¶ 998. Both memoranda analyze XRP under the Supreme Court’s holding in SEC v. W.J. Howey Co., 328 U.S. 293 (1946), which outlines the standard for an investment contract. Id. ¶ 988.