Former Securities and Exchange Commission (SEC) official John Reed Stark has criticized the recent ruling on Ripple Lab’s case, describing it as “troublesome on multiple fronts” in a LinkedIn analysis. The ruling, made by Judge Analisa Torres on July 13, favored Ripple in a lawsuit brought by the SEC in 2020, which alleged that the company’s XRP token was a security.
Stark delved into Judge Torres’ decision and examined the grounds on which she ruled in favor of Ripple. The verdict stated that the XRP token was considered a security when sold to institutional investors, but not in “programmatic sales” and other types of sales, such as token distribution to employees. Ripple now faces a penalty for the alleged violation, as well as a rescission for institutional investors, whose sales reportedly involved $720 million.
Judge Torres argued in her decision that institutional investors had a reasonable expectation that Ripple would utilize the capital received 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 could not reasonably expect the same outcome.
For Stark, this ruling establishes a “class of quasi-securities that discriminates” based on the sophistication of the investor. He expressed concern that the same token could be classified as a security at times and not at others, depending on the investor’s knowledge and level of protection. According to Stark, such an approach contradicts the principles of investor protection, which aim to provide equal safeguards regardless of an investor’s awareness of asset-related materials.
Stark, who served as an attorney for over 18 years in the SEC’s Enforcement Division, believes that this decision is on shaky ground and is likely to be appealed and ultimately overturned. He argues that stock is always stock and cannot transform into “not stock.” He predicts that the SEC will appeal the Ripple decision to the 2nd Circuit, and the rulings related to “programmatic” and “other sales” will be overturned.
Judge Torres’ ruling was celebrated by the crypto community and Ripple. Brad Garlinghouse, the CEO of Ripple, mentioned in a recent interview that the SEC might face a prolonged process before having the opportunity to appeal the decision. He also downplayed the significance of the institutional sale decision, considering it to be just a small part of the overall lawsuit. Garlinghouse expressed confidence that an appeal by the SEC against the retail sale ruling would only strengthen Judge Torres’ decision.
Overall, this ruling has ignited a debate regarding the classification of cryptocurrencies as securities and the implications for investor protection. Many are eagerly awaiting the potential appeal process and subsequent rulings to shed more light on these issues.
[Note: This article is also available as an NFT to preserve this moment in history and support independent journalism in the crypto space.]