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SEC vs. Ripple: #RelistXRP

By March 25, 2021No Comments


Hello and welcome to Legal Briefs – #RELISTXRP edition and thanks again for watching.

If you thought I had gone MIA it’s only because my office has been decimated by COVID – 5 of 15 staff have it and it’s no joke.  Stay safe everyone.

Today we have something a little different for you because generally speaking I review and breakdown the legal pleadings in the SEC v. Ripple case but tonight I am going to make an argument and I am going to do it to a hypothetical Judge A (Abra) Judge B (Binance!)  and of course Judge C (Coinbase).  See what I did there?

May it please this honorable Court. 

Today your honors I will argue the proposition that this Court should relist XRP and do so immediately.  As you are aware, the Securities and Exchange Commission filed a lawsuit against Ripple Inc. back on December 22 of 2020 and your honors halted sales of XRP shortly thereafter.  I believe that at the end of my presentation you will conclude that the delisting of XRP was irrational, unlawful, and easily AMENDED.

Before I begin my argument I would like the Court to take note that I am acutely aware that you have received various opinions from lawyers that delisting XRP was the prudent and safe course of action.  And therefore I am certain you are aware that the legal issue presented is whether XRP in its current form is being sold as an Investment contract and not under any exemption to the law.

So in that light  I believe that recent activity in the case should put your concerns at ease.  First, I would bring to the Court’s attention Exhibit #1 which is the transcript of the latest Court hearing in the underlying SEC v. Ripple case. 

Please direct your attention to pg. 44 lines 20-23 in which the following transpired:

THE COURT: Presumably under this theory then, every individual in the world who is selling XRP would be committing a Section 5 violation based on what you just said.

THE SEC: That’s not quite correct, your Honor. Section 5 has an exemption provision under Section 4. And broadly speaking, the Section 4 exemptions, I’m speaking very generally here, if these are transactions by people in the market, they are exempted by statute. Section 5, though, focuses on and is relevant to this case, the issuer and the affiliates of the issuer. So it is only Mr. Larsen and Mr. Garlinghouse, the CEOs, or someone on the board. The affiliates of the issue are captured by the statute.

The term “affiliate” is defined in Rule 405 of the Securities Act of 1933 as a “person (or entity) that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with,” an issuer. By that definition your honors are not affiliates and would not be subject to Section 5.

But I do understand that is only half the analysis because many of your activities consist of acting as a broker and not just connecting individual traders.  Therefore I would refer you to Exhibit #2 which is the SEC’s own response to the Motion for Writ of Mandamus filed in a related case.

If you would look at page 12 in the first paragraph you would see the SEC refer to 15 U.S.C. 77 which does hold that Court’s are the only decider as to what is and is not a security.  The SEC’s proclamation in and of itself does not have legal weight, as the SEC says itself:

“Thus, the Commission’s enforcement proceeding in the Southern District of New York, brought under the Securities Act, supplies the exclusive method for testing the validity of the Commission’s complaint against Ripple.”

Which is exactly correct and which is why THERE HAS BEEN NO LEGAL DETERMINATION that XRP is or is not Anything. Yet.

In fact, the SEC didn’t even request such a determination in its own lawsuit. Exhibit #3 is the Prayer for Relief in the Complaint and what you will notice is that the SEC did not even ask for such a determination.

So as you can see the SEC is seeking only disgorgement of profits and to enjoin Ripple from further sales and OF COURSE penalties.  There is no request for a declaration of XRP’s designation as a security and so there is a very real chance in this litigation that there never will be a designation from this litigation and therefore your Honors would not be affected by this litigation either way – except for the MONEY YOU ARE LOSING by not listing XRP and the loss of goodwill from those in America who wish to buy and sell!

Which leads me to my next line of argument which is that in order to have made a rational decision your Honors would have to make a determination that not only is Ripple likely to lose but that it is MORE Likely to lose than other crypto currencies also listed on your Exchanges.

And I would argue that, although the lawsuit initially led you to de-list XRP, the lawsuit at this point is a red herring because XRP at this point is obviously in as good or better position than many of the other coins you sell currently.

Let’s begin with the Howey test and whether Ripple sold XRP as an “investment contract.”  At this point in time the SEC has all but conceded that Ripple has made numerous individual “Sales” of XRP when it’s lawyer stated in Open Court and here we are referring back to Exhibit 1:

“each sale is a violation if it is made not made pursuant to a registration statement or qualifies for an exemption.”

Each sale is a separate violation.  So what that means as far as relisting is that Ripple is going to be able to have the Court look at current and future sales as distinct from sales from back in 2013/14/15 where XRP was more like a security than currently.

This is key because we then can look at the Howey Test for XRP as to current sales – and what do we see currently?  Do we currently have an investment contract?

Well, your honors I would argue that half of that battle is already won as Judge Netburn already pointed out when she made a recent comment that XRP has a “Currency Value” and “Utility”.

The other major part of the Howey Test is whether there is a “Common Enterprise” with pooling of money to invest in project.  First, this court should take judicial notice that the XRP ledger is fully decentralized with over 150 validators

And With most of the validators having no relationship whatsoever with Ripple.  (Special shout out to MoonLambo down there at the bottom of Exhibit 5.)

A decentralized setup lacks the horizontal structure seen in a typical sale of a security and further, Ripple has fully built out use cases for which XRP may be used and used regardless of Ripple’s even continued existence.

Finally as to the Howey Test we look to whether purchasers of XRP are reasonably looking to Ripple to create the value and profit for XRP and I can prove to your honors that this is not true with one simple picture – Exhibit 5:

In this picture you can see that the Green line representing the price pf XRP has for most of its recent  life moved and been correlated to the price of Bitcoin.  Look how strongly correlated the two were from 2018 up until recently.  Nothing Ripple the company has done has caused XRP to move as much as the price of Bitcoin has.  In fact, the price of Bitcoin was the MAIN driver of XRP price until December 2020 ..what happened December 2020?  Oh yes, this lawsuit, which caused the price and value of XRP to tumble – more than any announcement from Ripple could have ever done. Perhaps the SEC should sue itself then?

It’s a joke but It’s also clear, what Ripple the company does has almost no effect on XRP pricing.

The bottomline your honors is that there is no evidence so far from the SEC v. Ripple litigation that current-state XRP is likely to meet the definition of a sale of a security.  Remember, the Plaintiff, the SEC has the burden to prove each and every fact in the case and it hasn’t proven anything yet much less seem that it can.

Because the truth is that if you are really concerned about security designations of coins that you sell, you should look really hard at some others that have had ICOs as incoming commissioner Gensler has already suggested all ICOs are sales of securities – let me just throw out a couple names: Cardano – ICO in 2018.  Pollkadot – ICO in 2017 raising $140 million.  ETHEREUM – ICO in 2014.  All still listed all subject to lawsuit at any time.  Yet you chose to de-list XRP.

And let me leave you with one last suggestion.  If you see where the industry is headed in this lawsuit might I suggest to you that the SEC has setup a much easier alternative to registering as a full securities exchange.  It’s called an Alternative Trading System or “ATS” and the requirements for registration are streamlined and simplified and certainly your honors, if you value the business of XRP holder, could certainly spend some money and get registered as an ATS and then you could re-list XRP immediately without any concerns.

I happen to have a list of active ATS’ here as Exhibit 6.

Wait, Judge C, this is a surprise – look at who is already registered as an ATS! Someone is already locked and loaded to re-list XRP right away as an ATS.  Coinbase Securities.

I’ll be damned.  And with that, I rest my case.

Remember your honors, in life it is never ever ever too late to fix a mistake.  Thank you for your time.

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