BryanJ on Nostr: ANALYSIS: I've reviewed the district court ruling on XRP and it rests on very shaky ...
ANALYSIS: I've reviewed the district court ruling on XRP and it rests on very shaky ground. Expect an appeal.
AND Ethereum Foundation remains at risk even if its upheld because of important distinctions in the methods used by Ripple to sell the "pre-mine"
First, the District Court found that Ripple's sale of XRP to institutional investors DID amount to an unlawful security sale. Ripple received nearly a billion dollars from these sales, which they will presumably be required to return/disgorge. Plus penalties/fines.
BUT, the Court also found that, in the context of the "programmatic sale" of XRP to random people, that xrp DID NOT constitute an investment contract under Howey. And thus it was not a security.
But I think the Court's reasoning is weak. I'll explain why...
Howey of course requires three things: A scheme where one
[(1)] invests his money
[(2)] in a common enterprise and
[(3)] is led to expect profits solely from the efforts of the promoter or a third party.”
The Court here took issue with prong three. Why?
Here's what the Court said said when it DID find an investment contract (i.e. XRP as a Security) with respect to the Institutional Investors:
“From Ripple's communications, marketing campaign, and the nature of the Institutional Sales, reasonable investors would understand that Ripple would use the capital received from its Institutional Sales to improve the market for XP and develop uses for the XRP Ledger, thereby increasing the value of XRP.”
This sounds a lot like what the "programmatic" buyers would have expected as well. So why the difference? The Court found significant that the buyers couldn't know who was selling them the XRP. Thus, they couldn't have any expectation it was going to fund the enterprise
But why should this matter under Howey? The Q is not whether it's going to fund the common enterprise, but whether they can *expect* profits *from the efforts* of a 3rd party. And if the institutional investors expected profits from the sale, why not the blind bid/ask ppl?
The Court (IMO, incorrectly) relied on the fact buyers didnt know if the XRP came from Ripple. But that doesn't matter under Howey, only whether they expected profit based on the efforts of Ripple, which I think one could clearly say buyers expected (how else does XRP moon?)
And the court expressly acknowledges in a footnote that it does not reach the question of whether secondary sales constitute securities (i.e. P2P thru an exchange). So the holding is not just wrong in that misapplied Howey, but also rather limited even if it correctly applied it.
FINALLY: This does NOT clear the path for Ethereum Foundation even if it is upheld. Remember those institutional buyers that the Court found purchased unregistered securities? The pre-sale of Eth was ALOT like that. Why?
1) Everyone knew they were buying from Ethereum Foundation (which the Ripple Court found significant) but also,
2) The Eth purchased during the pre-sale was subject to lockup period, which was significant in finding the Institutional Investors bought XRP as a security
Don't want to diminish that this is definitely a win for Ripple. But it may be a short-lived victory. I think the Judge got the law wrong.
But even if she didn't, many projects (including Ethereum) remain exposed. And the Court left open many other vexing securities questions.
It's also worth noting that the Judge *rejected* key arguments from Ripple like the "essential elements" defense (which was a novel theory by their lawyers) and the "consumptive use" defense (i.e. our token has utility therefore it's not a security). /end
AND Ethereum Foundation remains at risk even if its upheld because of important distinctions in the methods used by Ripple to sell the "pre-mine"
First, the District Court found that Ripple's sale of XRP to institutional investors DID amount to an unlawful security sale. Ripple received nearly a billion dollars from these sales, which they will presumably be required to return/disgorge. Plus penalties/fines.
BUT, the Court also found that, in the context of the "programmatic sale" of XRP to random people, that xrp DID NOT constitute an investment contract under Howey. And thus it was not a security.
But I think the Court's reasoning is weak. I'll explain why...
Howey of course requires three things: A scheme where one
[(1)] invests his money
[(2)] in a common enterprise and
[(3)] is led to expect profits solely from the efforts of the promoter or a third party.”
The Court here took issue with prong three. Why?
Here's what the Court said said when it DID find an investment contract (i.e. XRP as a Security) with respect to the Institutional Investors:
“From Ripple's communications, marketing campaign, and the nature of the Institutional Sales, reasonable investors would understand that Ripple would use the capital received from its Institutional Sales to improve the market for XP and develop uses for the XRP Ledger, thereby increasing the value of XRP.”
This sounds a lot like what the "programmatic" buyers would have expected as well. So why the difference? The Court found significant that the buyers couldn't know who was selling them the XRP. Thus, they couldn't have any expectation it was going to fund the enterprise
But why should this matter under Howey? The Q is not whether it's going to fund the common enterprise, but whether they can *expect* profits *from the efforts* of a 3rd party. And if the institutional investors expected profits from the sale, why not the blind bid/ask ppl?
The Court (IMO, incorrectly) relied on the fact buyers didnt know if the XRP came from Ripple. But that doesn't matter under Howey, only whether they expected profit based on the efforts of Ripple, which I think one could clearly say buyers expected (how else does XRP moon?)
And the court expressly acknowledges in a footnote that it does not reach the question of whether secondary sales constitute securities (i.e. P2P thru an exchange). So the holding is not just wrong in that misapplied Howey, but also rather limited even if it correctly applied it.
FINALLY: This does NOT clear the path for Ethereum Foundation even if it is upheld. Remember those institutional buyers that the Court found purchased unregistered securities? The pre-sale of Eth was ALOT like that. Why?
1) Everyone knew they were buying from Ethereum Foundation (which the Ripple Court found significant) but also,
2) The Eth purchased during the pre-sale was subject to lockup period, which was significant in finding the Institutional Investors bought XRP as a security
Don't want to diminish that this is definitely a win for Ripple. But it may be a short-lived victory. I think the Judge got the law wrong.
But even if she didn't, many projects (including Ethereum) remain exposed. And the Court left open many other vexing securities questions.
It's also worth noting that the Judge *rejected* key arguments from Ripple like the "essential elements" defense (which was a novel theory by their lawyers) and the "consumptive use" defense (i.e. our token has utility therefore it's not a security). /end