Former SEC Official Criticizes Ripple’s Decision, Identifying Multiple Concerns

John Reed Stark, a former official at the Securities and Exchange Commission (SEC), has voiced criticism regarding the recent ruling in the Ripple Labs case, describing it as “troublesome on multiple fronts” in an analysis posted on LinkedIn.

Stark carefully examined the ruling by Judge Analisa Torres on July 13, which favored Ripple in a lawsuit initiated by the SEC in 2020. The lawsuit alleged that Ripple’s XRP token constituted a security.

According to Judge Torres’ verdict, the XRP token was considered a security when sold to institutional investors. However, it was not classified as a security in “programmatic sales” or other types of sales, including token distribution to employees. Ripple is now liable for penalties and faces a rescission requirement for institutional investors, whose sales reportedly amounted to $720 million.

In the decision, Judge Torres argued that institutional investors had a reasonable expectation that Ripple would utilize the capital from the token sales to enhance the XRP ecosystem and consequently increase the token’s price. On the other hand, investors who purchased XRP tokens through exchanges did not have the same reasonable expectations.

Stark finds fault with this judgment as it establishes a “class of quasi-securities” that discriminates based on the sophistication of the investor. He highlights the inconsistency that arises when the same token can be deemed a security at times but not at others. Stark argues that the decision offers less protection to retail investors who display ignorance or willful blindness and provides less liability for token issuers with limited disclosure.

Stark believes that this reasoning contradicts the principles of investor protection, which dictate that the level of protection should not depend on whether the investor reads materials related to the asset purchase. He notes, “Securities laws were specifically designed to protect individual investors, based on the idea that they can’t fend for themselves[…]. The Ripple decision turns this notion on its head.”

As an attorney with over 18 years of experience in the SEC’s Enforcement Division, Stark opines that the decision is on shaky ground and is likely to be appealed and subsequently reversed.

Stark predicts that the SEC will appeal the Ripple decision to the 2nd Circuit, expecting the court to overturn the District Court’s rulings regarding “programmatic” and “other sales.”

While the crypto community and Ripple celebrated Judge Torres’ ruling as a victory, Ripple CEO Brad Garlinghouse cautioned that the SEC may face a prolonged process before having an opportunity to appeal. Garlinghouse also downplayed the significance of the decision related to institutional sales, considering it the smallest aspect of the lawsuit. He suggested that an appeal by the SEC against the ruling on retail sales would only further support Judge Torres’ decision.

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