Former Securities and Exchange Commission official John Reed Stark has spoken out against the recent ruling on the Ripple Lab case, calling the decision “problematic on multiple fronts” in a LinkedIn analysis.
Stark discussed Judge Analisa Torres’ July 13 decision as she examined the reasons why she ruled in favor of Ripple in a lawsuit filed by the SEC in 2020, alleging that the company’s XRP token (XRP) was a security.
Some thoughts on the SEC/Ripple decision. https://t.co/A94kHlGI9N pic.twitter.com/lcwWML49kO
—John Reed Stark (@JohnReedStark) July 14, 2023
Judge Torres’ verdict states that the XRP token was a security when sold to institutional investors, but was not a security in “programmatic sales.” [public sales] and ‘other types of sales’, such as distributing tokens to employees. Ripple also faces a penalty for the alleged violation, as well as a termination for institutional investors, whose sales allegedly involved $720 million.
In the decision, Judge Torres argues that institutional investors “reasonably expected that Ripple would use the capital it received from its sales to improve the XRP ecosystem and thereby increase the price of XRP,” while investors who used exchanges to buy XRP tokens “might not reasonably expect the same.”
For Stark, the decision establishes a “class of quasi-securities that discriminates” based on the sophistication of the investor buying the token.
“The Ripple Decision argues that the exact same token can be a security sometimes, but not a security other times. And the more ignorance and willful blindness retail investors have, the less protection retail investors will receive. And the less disclosure about the token, then less liability for the token issuer. That just can’t be right.”
Stark also points out that this argument seems contrary to investor protection principles, which state that an investor’s level of protection should not be affected by reading material related to the purchase of an asset. “Securities laws were specifically designed to protect individual investors, based on the idea that they cannot fend for themselves […]. Ripple’s decision turns this notion on its head,” Stark noted.
In the opinion of Stark, who served as counsel for more than 18 years in the SEC’s Enforcement Division, the “decision lies on shaky ground, is likely (and ripe) for appeal, likely to result in reversal.” .
“The bottom line: Stocks are always stocks, they cannot be transfigured into ‘non-stocks’. So my view is that the SEC will appeal Ripple’s decision to the Second Circuit and the Second Circuit will vacate the related District Court rulings. with ‘programmatic’ and ‘other sales,'” he said.
Judge Torres’ ruling was greeted as a victory by the crypto community and Ripple. The company’s CEO, Brad Garlinghouse, said during a recent interview that the SEC could face a lengthy process before getting a chance to appeal the decision. Additionally, Garlinghouse called the institutional sale decision “the smallest piece” of the lawsuit and said an SEC appeal against the retail sale ruling would only strengthen Torres’ ruling.
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This post Ripple’s decision is ‘problematic on multiple fronts,’ says former SEC official
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