The SEC vs. Ripple Labs, Inc.
מעודכן
A brief history
In 2004, a few years before the introduction of the white paper and Bitcoin by Satoshi Nakamoto, Ryan Fugger conceived the idea now known as Ripple. Initially, Ripple was not based on blockchain technology. The development of blockchain technology and its implementation within Ripple began in 2012 after Ryan Fugger handed over his project to Chris Larsen, David Schwarz, and the former co-founder of the infamous Mt. Gox, Jed McCaleb.
Subsequently, this group of entrepreneurs founded OpenCoin and that same year began to use RipplePay source code to create their own ledger-based payment network for financial institutions. Later, in 2013, OneCoin was renamed to Ripple Labs Inc. and began raising funds. That same year, Jed McCaleb departed from the company to pursue the Stellar Lumens (XLM) project.
Meanwhile, the Ripple cryptocurrency rose from a mere fraction of a cent to the all-time-high value of 3.55 USD in 2018. Although, after tens of thousands of percent in gains, Ripple lost more than 90% of its value within the following year. After that, in March 2020, XRP found a bottom and started to rise in a new bull market propelled by an unprecedented amount of quantitative easing and stimulus checks being handed out to American citizens by the government.
However, despite other cryptocurrencies reaching new all-time highs, Ripple's performance remained muted in comparison to the previous bull cycle, with many people blaming it on the SEC lawsuit from December 2020. In a new uptrend, Ripple reached 1.98 USD before erasing most of its gains and returning to the range between 0.20 USD and 0.40 USD.
After two years of court proceedings, the case nears its end, which has started the bullish speculation that elevated the price to a recent high of 0.55 USD, and which led us to announce a warning to investors. Just two weeks ago, we called the bounce characteristic of “buy the rumor, sell the fact” behavior. Today, we still hold this notion and remain bearish on XRPUSD. Accordingly, we stick to our price targets of 0.30 USD and 0.28 USD. The rationale behind our reasoning is described below.
The SEC lawsuit against Ripple Labs Inc.
In December 2020, the SEC filed an action against Ripple Labs Inc., alleging that the company raised 1.3 bn. USD through an unregistered digital asset securities offering. Based on the SEC's complaint, Christian Larsen, the company's co-founder, and Bradley Garlinghouse raised capital to finance the company's business by selling cryptocurrency tokens to investors in the U.S. and globally. In addition to that, Ripple distributed billions of XRP tokens in exchange for labor and various services. As if it was not enough, Larsen and Garlinghouse executed personal sales worth approximately 600 mil. USD, potentially breaking federal securities laws by not registering their sales of XRP tokens.
The latest developments within the lawsuit and Hinman's remarks
A few days ago, U.S. District Court Judge Analisa Torres ruled to release the documents from the former Director of the Securities and Exchange Commission's Division of Corporation Finance. These documents relate mainly to the speech of Hinman at the Yahoo Finance All Economic Summit in 2018.
In his 2018 speech, Hinman said that some cryptocurrencies would not be considered securities (and which many investors seem to consider bullish for XRP in the past few days). However, we would like to remind investors that right at the beginning of his speech, Hinman noted that opinions conveyed in the speech are opinions of his own, and not those representing the SEC.
Then, just about a minute later, Hinman proceeded to distinguish between securities and potentially “something other than a security.” He noted that if a cryptocurrency carried a third-party promotion, it would most likely fit the security description.
Subsequently, he described a promotion as raising funds (through selling tokens instead of issuing a stock) by promoters to fund a company's operations with the goal of achieving financial gains for themselves and their investors. Furthermore, he provided the example of the SEC case versus W.J.Howey Co. from 1946. In that example, Hinman outlined how the character of a transaction is a determining factor in whether an asset is a security or not.
He later continued clarifying how a transaction could potentially not represent a securities offering. For that matter, he stated that the network on which a cryptocurrency is based would have to be sufficiently decentralized, and “purchasers would no longer have reasonable expectations that a person or a group will carry out managerial and entrepreneurial efforts”. According to Hinman's following remarks, only under such conditions, a transaction might not represent an investment contract.
After that, Hinman finally proceeded to make remarks about Ethereum “while putting aside a fundraising of that company.” He stated that at “the current” time (in 2018), offers and sales of Ethereum were not securities transactions. Then, he said that over time there might be other sufficiently decentralized systems, like in the case of Bitcoin and Ethereum, while omitting any other cryptocurrencies, including Ripple.
In next Hinman's remarks, he talked about “a plethora of federal regulations that apply beyond the securities laws.” Furthermore, he noted “a few things” that the SEC could look at in order to determine whether an asset is a security.
“A few things the SEC could look at” or ask
1. Is there a person or a group who sponsors the promotion and creation of the sale of the asset?
2. Does a person or a group who sponsors the promotion and creation of the sale of the asset play a significant role in the development and maintenance of that asset and its potential increase in value?
3. Does a person or a group who sponsored the promotion and creation of the sale of the asset retain a stake and/or other interests in the digital asset?
4. Did the promoter raise an amount of funds in excess of what might be needed to establish the running and functional network? If so, did the promoter indicate to investors how these funds might be used to support the value in the 5. secondary market (or increase the value of the enterprise)?
6. Does the promoter continue to expend funds from the proceeds for enhancing the functionality or to just enhance the secondary market value?
7. Do people or entities other than the promoter exercise governance rights and have a meaningful influence on the network?
8. Is the token creation commensurate with meeting the needs of real users rather than feeding speculation?
9. Are independent actors setting the price, or is the promoter supporting the market?
Our assessment
As it is impossible to tell what will be the outcome of the legal battle between the SEC and Ripple, we are allowed only to speculate about the court ruling. However, based on Hinman's introductory remarks in his speech regarding personal opinions and not those of the SEC or its staff, we would argue that the speech is a weak point of evidence for Ripple.
Indeed, we think the same about Ethereum and Bitcoin statements. Hinman said that Ethereum and Bitcoin were not cryptocurrencies at that particular time (during the speech - in 2018). Meanwhile, the lawsuit pertains to the period around 2013 and not to 2018. In addition to that, Hinman did put aside the early stages of Ethereum and its fundraising. Furthermore, he did also mention several requirements for a cryptocurrency to be potentially viewed as something else than “a security.”
These requirements would require no third-party promoter and a sufficiently decentralized network, among many other requirements like no reliance on entrepreneurship of a company's leadership. However, after Ryan Fugger sold his project in 2012, the development of Ripple blockchain technology solely relied on the company's new management.
Furthermore, the management (allegedly) profited from the sales of XRP as Larsen and Garlinghouse executed personal sales worth approximately 600 mil. USD. In our opinion, all these points represent a significant obstacle for Ripple to winning the SEC lawsuit.
DISCLAIMER: This content is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not be a basis for taking any trade action by an individual investor. Therefore, your own due diligence is highly advised before entering a trade. The article serves solely educational purposes and contains merely alleged information and not actual claims about the actions of those described in the article.
In 2004, a few years before the introduction of the white paper and Bitcoin by Satoshi Nakamoto, Ryan Fugger conceived the idea now known as Ripple. Initially, Ripple was not based on blockchain technology. The development of blockchain technology and its implementation within Ripple began in 2012 after Ryan Fugger handed over his project to Chris Larsen, David Schwarz, and the former co-founder of the infamous Mt. Gox, Jed McCaleb.
Subsequently, this group of entrepreneurs founded OpenCoin and that same year began to use RipplePay source code to create their own ledger-based payment network for financial institutions. Later, in 2013, OneCoin was renamed to Ripple Labs Inc. and began raising funds. That same year, Jed McCaleb departed from the company to pursue the Stellar Lumens (XLM) project.
Meanwhile, the Ripple cryptocurrency rose from a mere fraction of a cent to the all-time-high value of 3.55 USD in 2018. Although, after tens of thousands of percent in gains, Ripple lost more than 90% of its value within the following year. After that, in March 2020, XRP found a bottom and started to rise in a new bull market propelled by an unprecedented amount of quantitative easing and stimulus checks being handed out to American citizens by the government.
However, despite other cryptocurrencies reaching new all-time highs, Ripple's performance remained muted in comparison to the previous bull cycle, with many people blaming it on the SEC lawsuit from December 2020. In a new uptrend, Ripple reached 1.98 USD before erasing most of its gains and returning to the range between 0.20 USD and 0.40 USD.
After two years of court proceedings, the case nears its end, which has started the bullish speculation that elevated the price to a recent high of 0.55 USD, and which led us to announce a warning to investors. Just two weeks ago, we called the bounce characteristic of “buy the rumor, sell the fact” behavior. Today, we still hold this notion and remain bearish on XRPUSD. Accordingly, we stick to our price targets of 0.30 USD and 0.28 USD. The rationale behind our reasoning is described below.
The SEC lawsuit against Ripple Labs Inc.
In December 2020, the SEC filed an action against Ripple Labs Inc., alleging that the company raised 1.3 bn. USD through an unregistered digital asset securities offering. Based on the SEC's complaint, Christian Larsen, the company's co-founder, and Bradley Garlinghouse raised capital to finance the company's business by selling cryptocurrency tokens to investors in the U.S. and globally. In addition to that, Ripple distributed billions of XRP tokens in exchange for labor and various services. As if it was not enough, Larsen and Garlinghouse executed personal sales worth approximately 600 mil. USD, potentially breaking federal securities laws by not registering their sales of XRP tokens.
The latest developments within the lawsuit and Hinman's remarks
A few days ago, U.S. District Court Judge Analisa Torres ruled to release the documents from the former Director of the Securities and Exchange Commission's Division of Corporation Finance. These documents relate mainly to the speech of Hinman at the Yahoo Finance All Economic Summit in 2018.
In his 2018 speech, Hinman said that some cryptocurrencies would not be considered securities (and which many investors seem to consider bullish for XRP in the past few days). However, we would like to remind investors that right at the beginning of his speech, Hinman noted that opinions conveyed in the speech are opinions of his own, and not those representing the SEC.
Then, just about a minute later, Hinman proceeded to distinguish between securities and potentially “something other than a security.” He noted that if a cryptocurrency carried a third-party promotion, it would most likely fit the security description.
Subsequently, he described a promotion as raising funds (through selling tokens instead of issuing a stock) by promoters to fund a company's operations with the goal of achieving financial gains for themselves and their investors. Furthermore, he provided the example of the SEC case versus W.J.Howey Co. from 1946. In that example, Hinman outlined how the character of a transaction is a determining factor in whether an asset is a security or not.
He later continued clarifying how a transaction could potentially not represent a securities offering. For that matter, he stated that the network on which a cryptocurrency is based would have to be sufficiently decentralized, and “purchasers would no longer have reasonable expectations that a person or a group will carry out managerial and entrepreneurial efforts”. According to Hinman's following remarks, only under such conditions, a transaction might not represent an investment contract.
After that, Hinman finally proceeded to make remarks about Ethereum “while putting aside a fundraising of that company.” He stated that at “the current” time (in 2018), offers and sales of Ethereum were not securities transactions. Then, he said that over time there might be other sufficiently decentralized systems, like in the case of Bitcoin and Ethereum, while omitting any other cryptocurrencies, including Ripple.
In next Hinman's remarks, he talked about “a plethora of federal regulations that apply beyond the securities laws.” Furthermore, he noted “a few things” that the SEC could look at in order to determine whether an asset is a security.
“A few things the SEC could look at” or ask
1. Is there a person or a group who sponsors the promotion and creation of the sale of the asset?
2. Does a person or a group who sponsors the promotion and creation of the sale of the asset play a significant role in the development and maintenance of that asset and its potential increase in value?
3. Does a person or a group who sponsored the promotion and creation of the sale of the asset retain a stake and/or other interests in the digital asset?
4. Did the promoter raise an amount of funds in excess of what might be needed to establish the running and functional network? If so, did the promoter indicate to investors how these funds might be used to support the value in the 5. secondary market (or increase the value of the enterprise)?
6. Does the promoter continue to expend funds from the proceeds for enhancing the functionality or to just enhance the secondary market value?
7. Do people or entities other than the promoter exercise governance rights and have a meaningful influence on the network?
8. Is the token creation commensurate with meeting the needs of real users rather than feeding speculation?
9. Are independent actors setting the price, or is the promoter supporting the market?
Our assessment
As it is impossible to tell what will be the outcome of the legal battle between the SEC and Ripple, we are allowed only to speculate about the court ruling. However, based on Hinman's introductory remarks in his speech regarding personal opinions and not those of the SEC or its staff, we would argue that the speech is a weak point of evidence for Ripple.
Indeed, we think the same about Ethereum and Bitcoin statements. Hinman said that Ethereum and Bitcoin were not cryptocurrencies at that particular time (during the speech - in 2018). Meanwhile, the lawsuit pertains to the period around 2013 and not to 2018. In addition to that, Hinman did put aside the early stages of Ethereum and its fundraising. Furthermore, he did also mention several requirements for a cryptocurrency to be potentially viewed as something else than “a security.”
These requirements would require no third-party promoter and a sufficiently decentralized network, among many other requirements like no reliance on entrepreneurship of a company's leadership. However, after Ryan Fugger sold his project in 2012, the development of Ripple blockchain technology solely relied on the company's new management.
Furthermore, the management (allegedly) profited from the sales of XRP as Larsen and Garlinghouse executed personal sales worth approximately 600 mil. USD. In our opinion, all these points represent a significant obstacle for Ripple to winning the SEC lawsuit.
DISCLAIMER: This content is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not be a basis for taking any trade action by an individual investor. Therefore, your own due diligence is highly advised before entering a trade. The article serves solely educational purposes and contains merely alleged information and not actual claims about the actions of those described in the article.
הערה
Statements within the complaint:"As CEO, Larsen ran Ripple’s day-to-day operations and was responsible for all
aspects of company products and strategy and for the growth of and investment in the company. Larsen solicited and participated in meetings with current and prospective Ripple equity and XRP investors and regularly updated Ripple’s Board of Directors and shareholders."
"Co-Founder, Larsen, and Ripple Agent-1 then transferred 80 billion XRP to Ripple
and the remaining 20 billion XRP to themselves—9 billion XRP each to Co-Founder and Larsen and 2 billion XRP to Ripple Agent-1—as compensation for Ripple’s founders. After this transfer, Ripple and its founders controlled 100% of XRP."
הערה
"Ripple sought the advice of an international law firm regarding certain state andfederal legal risks associated with the distribution and monetization of XRP."
"The Legal Memos warned that there was some risk that XRP would be considered
an “investment contract” (and thus a security) under the federal securities laws depending on various factors. These included, among other things, how Ripple promoted and marketed XRP to potential purchasers, the motivation of such purchasers, and Ripple’s other activities with respect to XRP. If individuals purchased XRP “to engage in speculative investment trading” or if Ripple employees promoted XRP as potentially increasing in price, the Legal Memos warned that Ripple would face an increased risk that XRP units would be considered investment contracts (and thus securities)."
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