In a recent analysis on LinkedIn, John Reed Stark, a former attorney in the Securities and Exchange Commission’s Enforcement Division, expressed concerns about the ruling in favor of Ripple Labs. Stark believes the decision is “troublesome on multiple fronts.”
Examining the ruling by Judge Analisa Torres on July 13, Stark identified the grounds on which she ruled in favor of Ripple in a lawsuit brought by the SEC in 2020. The lawsuit alleged that Ripple’s XRP token was a security.
The Verdict and Its Implications
Judge Torres concluded that the XRP token was a security when sold to institutional investors. However, she determined that it was not a security in “programmatic sales” or other types of sales, such as token distribution to employees. Ripple is also facing a penalty for the alleged violation, as well as a rescission for institutional investors involving $720 million.
According to Judge Torres, institutional investors had a reasonable expectation that Ripple would utilize the capital from its sales to enhance the XRP ecosystem and increase the token’s price. On the other hand, investors who purchased XRP tokens through exchanges did not have the same reasonable expectation.
Quasi-Securities and Investor Protection
Stark argues that this decision establishes a “class of quasi-securities” that discriminates based on the sophistication of the investor. He raises concerns about the inconsistency in treating the same token as a security in some instances but not in others.
Additionally, he highlights the impact on retail investors, suggesting that the less they know about a token, the less protection they receive, and the less liability the token issuer faces. Stark finds this notion contradictory to investor protection principles and the purpose of securities laws.
Drawing from his extensive experience in the SEC’s Enforcement Division, Stark further predicts that the decision is on shaky ground and likely to be appealed and reversed. He believes that the SEC will appeal the Ripple decision to the 2nd Circuit, and the 2nd Circuit will overturn the District Court’s rulings regarding “programmatic” and “other sales.”