The main issue in the lawsuit is whether $XRP are considered “securities” under US law, a determination that could significantly impact the regulatory obligations of digital currencies.
Ripple's defense essentially argues that XRP does not meet securities standards based on the Howey Test, a standard for defining investment contracts. However, Judge Hamilton focused her decision on taking the case to trial.
“Plaintiffs have presented no further argument in favor of conclusive judgment on the fourth cause of action relating to misleading statements regarding the offer or sale of securities, and therefore conclusive judgment on this cause of action is denied and the action will proceed to trial,” the court document stated.
Despite the court's decision, there has been no significant impact on the XRP price so far. At the time of writing, it is trading at $0.4901, down about 1.12% over the past 24 hours.
Ripple (XRP) still faces challenges of being classified as a security
The plaintiff, Bradley Szostak, alleges that Garlinghouse's statements were misleading, as he sold millions of XRP that same year.
“I'm heavily invested in XRP as a percentage of my personal balance sheet... I'm not invested in some of the other digital assets, because it's not clear to me what the real benefit is, what problem they're actually solving... If you're solving a real, broad problem, I think You have a great opportunity to continue to grow. We've been fortunate obviously, I'm still very invested in XRP, there's an expression in the industry HODL, which stands for holding, it's HODL... I'm on the HODL side," Garlinghouse said in a 2017 TV interview.
The case was filed in California District Court, and includes several serious allegations against Ripple Labs, its XRP subsidiary, and CEO Garlinghouse. These include unregistered offers and sales of securities and misleading statements regarding the sale of securities.
Furthermore, this case contradicts a previous ruling by Judge Analisa Torres of the Southern District of New York. In that case, Torres found that Ripple's "programmatic sales" and other XRP distributions were not investment contracts, exempting them from certain securities regulations.
However, it ruled that Ripple's institutional sales of $728.9 million of XRP were actually unregistered investment contracts, in violation of Section 5 of the Securities Act.