A Former SEC Officer’s Take on Ripple’s Fleeting SEC Lawsuit Triumph
John Reed Stark, a former Chief of the SEC Office of Internet Enforcement, recently shared his expert analysis of the Ripple decision in a post on LinkedIn. Published on July 16, 2023, Stark’s insights offer a comprehensive breakdown of the court’s ruling, suggesting that while it may seem like a cause for celebration at first, it is ripe for appeal.
According to a Reuters report on July 13, 2023, the court categorized Ripple’s offering into three sections: Institutional Sales, Programmatic Sales, and Other Sales. Stark emphasized that the court classified XRP as a security when sold to institutional investors, making it an illegal sale of securities. Consequently, these investors are eligible for rescission, and Ripple is obligated to pay a penalty of approximately $720 million for this violation.
Stark also highlighted that the court dismissed Ripple’s fair notice defense, asserting that Ripple was well aware that offering its product without registration was against the law. However, the court did not address Ripple’s fair notice defense regarding other transactions and schemes.
Regarding XRP sales on public cryptocurrency exchanges, the court ruled that they did not qualify as offers of securities under the law. The court reasoned that buyers did not have a reasonable expectation of profit tied to Ripple’s efforts in these “blind bid/ask transactions.” Buyers could not ascertain if their payments went to Ripple or other sellers of XRP.
Nevertheless, the SEC secured a partial victory as the court concluded that Ripple’s sales of $728.9 million worth of XRP to hedge funds and other sophisticated buyers were unregistered sales of securities. The court found that Ripple’s marketing efforts targeting institutional investors explicitly promoted a speculative value proposition for XRP, dependent on the company’s efforts to develop the blockchain infrastructure behind the digital asset.
Stark’s analysis suggests that the Ripple decision raises concerns on various fronts and is highly likely to be appealed. He concluded by stating that the ruling appears counter-intuitive, inconsistent with SEC case law, and unprecedented in this particular context.
Stark’s post offers a thorough and insightful examination of the court’s decision, shedding light on the intricacies of the case and the potential ramifications for Ripple and the wider cryptocurrency industry. Given his expertise and experience in internet enforcement, his analysis serves as a valuable resource for individuals interested in understanding the evolving regulatory landscape surrounding cryptocurrencies. As the industry continues to expand and mature, Stark’s perspectives will undoubtedly provide essential context and comprehension of these intricate matters.
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