John Reed Stark, former Chief of the SEC Office of Internet Enforcement, recently shared his insights on the Ripple decision in a LinkedIn post. Stark’s analysis, published on July 16, 2023, provides a detailed breakdown of the court’s ruling, which he believes is a momentary cause for celebration at best and is ripe for appeal.
The court’s decision, as reported by Reuters on July 13, 2023, broke down Ripple’s offering into three categories: Institutional Sales, Programmatic Sales, and Other Sales. Stark highlighted that the court deemed XRP a security when sold to institutional investors, thereby constituting an unlawful sale of securities. These investors are entitled to rescission, and Ripple must pay a penalty for the violation, involving reportedly $720 million.
Stark also pointed out that the court rejected Ripple’s fair notice defense, stating that Ripple had adequate notice that its offering without registration was illegal. However, the court did not address Ripple’s fair notice defense concerning other transactions and schemes.
The court ruled that Ripple’s XRP sales on public cryptocurrency exchanges were not offers of securities under the law, because purchasers did not have a reasonable expectation of profit tied to Ripple’s efforts. These sales were “blind bid/ask transactions,” in which buyers “could not have known if their payments of money went to Ripple, or any other seller of XRP.”
However, the SEC did win a partial victory as Torres found the company’s $728.9 million of XRP sales to hedge funds and other sophisticated buyers amounted to unregistered sales of securities. Torres ruled that Ripple’s marketing aimed at institutional investors made clear the company “was pitching a speculative value proposition for XRP” that depended on company efforts to develop the blockchain infrastructure behind the digital asset.
Stark’s analysis suggests that the Ripple decision is troubling on multiple fronts and is likely to be appealed. He concluded by stating that the Ripple decision seems counter-intuitive, inconsistent with SEC case law, and unprecedented in this context.
Stark’s post provides a detailed and insightful analysis of the court’s ruling, shedding light on the complexities of the case and the potential implications for Ripple and the broader cryptocurrency industry. His expertise and experience in the field of internet enforcement make his analysis a valuable resource for anyone interested in the evolving regulatory landscape for cryptocurrencies. As the industry continues to grow and mature, Stark’s insights will undoubtedly continue to provide valuable context and understanding of these complex issues.