TRANSCRIPTION FROM VIDEO:
Hello and welcome to Legal Briefs – all crypto all XRP all the time apparently. This is attorney Jeremy
Hogan and today we are going to talk about settlement of the SEC v. Ripple lawsuit because everyone is
talking about settlement (usually followed by a strange reference to a lunar landing or Italian sports car)
but…what would that look like and what would that mean to Ripple and to XRP? Stick around – all your
questions will be answered.
As you may know, the whole lawsuit revolves around whether XRP is a security and the seminal case in
the United States is the SEC v. Howey case which involved the sale of orange groves which were deemed
securities by the Supreme Court. Just like the good teacher I used to be, today we are taking a field trip
outside because out in the field is the best place to learn!
So, the SEC regulates companies by something called selective enforcement. The SEC can’t sue every
market participant involved in violations of securities laws so it files select lawsuits on issues that will
send a message to other market participants. It’s like being a parent – you randomly spank one of your
kids for doing what all the others are doing, just to keep them in line.
And in regard to the crypto industry you can see that there are and have been surprisingly few lawsuits
filed by the SEC. And the lawsuits that ARE filed are parsed over by private securities lawyers and used in
opinion letters to crypto companies saying “don’t do this” or make sure to “do that.”
Looking at this chart you can see the number of crypto-related lawsuits filed by the SEC really picked up
in 2018. What we are looking at is the pastel green-blue color and those are lawsuits filed and you can
see in all of 2020 17 crypto lawsuits were filed of various types – some were for fraud, some were very
small coins. The big one of course was the Ripple lawsuit.
But the truth is that most of the companies or individuals that were sued either threw their hands up
and said “got me” and consented to judgment, or fought the charges but quickly realized they were
going to be ran into the ground because they couldn’t afford the millions of dollars it takes to fight these
lawsuits OR, the SEC was able to get a judge to sign off on an emergency injunction which essentially
freezes your bank accounts and makes it impossible for you to fight.
So we really only have a handful of examples as far as “settlements” and NONE of them from a company
in the position Ripple is in. In fact, the only companies that really had the resources to fight were
Telegram and Kik Interactive and they ended up losing. Once they lost at summary judgment, Kik
smartly used whatever bargaining power it had left to agree to terms with the SEC. But by that time, Kik
had the same bargaining power that Hirohito had with America at the end of World War II – not much.
The judgment in the KIK case was essentially in 3 parts:
The first part is Roman Numeral I and it says that “the Defendant is permanently restrained and
enjoined from violating Section 5 of the Securities Act.” Etc.etc.
I laughed when I read this because it’s basically saying “KIK is enjoined from breaking the law again.”
Which is just silly – so I assume that’s something the SEC insisted on but I’m not sure why.
The second part of the judgment – Roman Numeral II was more interesting. It requires KIK to give the
SEC 45 days notice before selling any more of the Kin Coins. But even more interesting is this: “Nothing
in this paragraph requires…Defendant to provide the Commission with any information beyond…the
Notice what the judgment does NOT say. It does NOT say that the Kin Coin is a security. It does not say
that KIK could not sell more Kin Coins. Why is that? Because the coins themselves are not inherently
securities and if that was not true the language in the judgment makes no sense. So KIK was able to
negotiate that language that would essentially allow it to sell the Kin coin even after the judgment. And
in fact, the Kin coin was and is still sold on many exchanges and no one else, to my knowledge, has been
sued or gotten in trouble.
And finally, the 3 rd part of the judgment was a penalty or fine of $5 million dollars and it was paid to the
State and I believe those are funds the SEC uses to operate. “Defendant shall satisfy this obligation by
paying $5 million to the SEC within 30 days…”
And of note in the Kik Interactive case there was no disgorgement of money from KIK Interactive with
the money to be returned to investors. This sets it apart from for example the Telegram case in which
the company had all monies “disgorged” to the tune of $1.2 Billion and a fund was setup for purchasers
to recover some of their investment.
SO, that is what we have to work with – a handful of consent judgments. But I think they give us a
framework for what a settlement would look like.
Let’s do some conjecture, shall we?
Let’s say you’re the SEC’s lawyers and you were told to file this lawsuit by the outgoing head of the
department. You’re not sure why but you do as you are told. What do you need in a settlement? First,
you want to walk away without damaging your street creed with other crypto companies – you don’t
want them to think their ICOs are all good because of the settlement.
So yes, you want the language “enjoining” Ripple from any future illegal sales. What else do you want?
You want a civil penalty. Why? That shows Ripple did do something wrong. Also, it’s essentially where
the money comes from that pays you and your friend’s salaries.
Still staying with the SEC, the next part of your thinking is more difficult. You, the SEC lawyer, are
ostensibly supposed to be protecting Main Street – the “investors” who were scammed. Problem is,
because your agency waited 9 years, XRP has changed hands millions of times. In other words, there’s
just no way to fairly “disgorge” profits to investors because there’s no way of fairly knowing who to
“disgorge” to. How would you even come up with a plan to disgorge say a billion dollars that Ripple
pays – to who? Plus, there’s that small problem that it was literally your lawsuit that caused the most
Okay, enough of that – I can feel the humanity being sucked out of me, let’s switch sides to Ripple.
What does Ripple need in a settlement?
First, it needs to be able to maintain it’s business. Paragon was sued by the SEC and drove out of
business so that NOT happening will be Ripple’s most important issue. So, if a penalty is imposed or
“disgorgement” of profits from sales, it will have to be at a level a that does not bankrupt the company.
For me, that would be like $100. For Ripple, I don’t know.
WE do know that per the Complaint, Ripple sold approximately $1.38 BILLION USD in XRP between 2013
and when the lawsuit was drafted. That’s looking at paragraphs 79 and 80 of the Complaint.
But whatever number we might see in a settlement, I can guarantee you that it will be a number that
Ripple can afford.
Second, Ripple needs some “clarity” moving forward. It needs to know, and importantly, needs the
secondary market to know that this whole SEC thing is over. In fact, Ripple’s On Demand Liquidity
product is based in part on there being a liquid secondary market. This is going to be tricky for Ripple
but it was helped in large part by the SEC making the lawsuit not just about past sales of XRP but also
Here’s why. So, generally speaking a lawsuit settlement includes all relevant terms of the settlement
and, especially if the Defendant is paying money, the consideration from the Plaintiff will be a dismissal of the lawsuit. And since the SEC has apparently includes current and even future sales of XRP, the
dismissal would effectively end litigation over even future sales of XRP.
But what about the secondary markets? That’s the trickiest part for Ripple because the SEC will NEVER
agree to not sue the secondary markets – it really can’t. So Ripple is left with the ONLY option for them
is to include terms which make it clear that the penalties are only in effect through a certain date. For
example, a clause that states “Ripple will pay penalties for sales of securities from 2013 thru 2017.” Or
otherwise make it clear that sales at least from the filing of the lawsuit forward are NOT sales of
securities.. That is the MOST clarity that the exchanges will get from a settlement. But, I’d argue that is
pretty strong clarity – probably enough to get their lawyers on board with re-listing XRP.
And, if Ripple is nervous about the potential outcome of the case, I can even see them agreeing to pay a
percentage of any sales of the escrowed XRP or if you want to go really deep state thinking, Ripple could
even agree to confiscation of a certain amount of the escrowed XRP to the State ? Maybe that’s a little
fringe conjecture but here’s what not:
Ripple is apparently at a place business-wise where it could likely afford to make sales from escrow to
only accredited investors or to corporations thanks to its On Demand Liquidity product. This might allay
SEC concerns regarding public sales and Ripple seems to now be in a position to do so. This is from a
May 2021 CoinTelegraph article:
“The company also reported that over the quarter 3 billion XRP had been released from its escrow
holdings while 2.7 billion XRP had been returned to new escrow contracts.”
Ripple sold twice as much XRP in the last quarter as demand grows for its ODL service
So, Ripple is re-escrowing the large percentage of the XRP it holds in escrow and maintaining its business
functions from sales to its ODL customers and those customers are banks and money transfer services,
etc. Not exchanges or public Joe-Blow purchasers. If this is true it puts Ripple in a good position to
agree to only private or Section D sales.
So in summary, I believe that a settlement agreement would likely include Ripple paying a penalty but a
penalty specifically limited to dates pre-lawsuit. A settlement would likely NOT include disgorgement of
profits to purchasers because of the impossibility of figuring out how to disburse the funds. A
settlement could very well contain a term which includes limitations on the sales of XRP released from
Now, if you think things through, a settlement similar to what I’ve outlined would do a couple things, it
would satisfy Ripple’s concerns: namely, maintaining its business and ODL.
The next effect would be to give the exchanges the confidence to re-list XRP. They just need a little
push. For example, I don’t think the Kik Interactive coin – the Kin Token was ever even de-listed so the
exchanges just need a little push and I’m confident a settlement as outlined would lead to re-listing of
XRP en masse.
The next thing and maybe the most “conjecture-ish” is the agreement to limit sales to private sales to
companies and ciients. This would effect limit or slow the flow of XRP in escrow in the matket. Sales to
Section D or corporate purchasers cannot be then put into a public exchange for I think 6 months to a
year. So a settlement containing this term would essentially bottleneck the flow of XRP into the market
And finally, the settlement would put XRP in the clear as far as securities violations and such. Ripple
would be the first crypto company to be 100% in the clear.
And that’s what I’ve put together from reviewing the Kik and Tleegram cases and from settling hundreds
of cases myself. I hope you enjoyed my conjecture. Remember from our fieldtrip earlier this video, you
can look up anything on your computer nowadays but nothing, nothing beats going out into the world
and seeing and feeling it yourself. Google “love” and I’m sure you’ll agree. Thanks for watching.