Jeremy Hogan, a partner at the American law firm Hogan & Hogan, says a recent public statement by two “brave” members of the U.S. Securities and Exchange Commission (SEC) could help Ripple win the lawsuit filed against them by the SEC in December 2020.
On 22 December 2020, the SEC announced that it had “filed an action against Ripple Labs Inc. and two of its executives, who are also significant security holders, alleging that they raised over $1.3 billion through an unregistered, ongoing digital asset securities offering.” The two Ripple executives being sued by the SEC were CEO Brad Garlinghouse and Chairman Chris Larsen.
The basis of Ripple’s defense against the SEC’s allegations is that it believes that XRP was never a security (since it fails the Howey Test, meaning that it is not subject to U.S. securities laws) and that even if the court comes to the conclusion that XRP was/is a security, there has been such a lack of regulatory clarity when it comes to crypto that Ripple is entitled to use the “Fair Notice” defense, i.e. that did not have reasonable fair notice from the SEC about whether its sales of XRP tokens would be deemed illegal sales of unregistered securities.
In an article for Law360 published on January 25, Joseph A. Hall, a former executive at the SEC, explained why “there’s a good chance” his former employer loses its lawsuit against Ripple Labs.
Hall has been a partner in American law firm Davis Polk since September 2005. Before that, between October 2003 and June 2005, he was working at the SEC, where he ultimately served as Managing Executive for Policy under Chairman William H. Donaldson, where he assisted the Chairman in “directing the Commission’s policy-making and enforcement activities.”
In the aforementioned article, Hall explained how inadequate the SEC’s Howey test is for deciding whether a particular cryptoasset is a security:
“Imagine trying to explain what an iPhone is in language your great-grandfather would have understood just after World War II. That’s how easy it is to predict which digital assets are securities under the postwar Howey test.“
On July 14, the SEC announced that it had reached a settlement with UK-based Blotics Ltd. (formerly known as Coinschedule Ltd.), the operator of Coinschedule.com, “a once-popular website that profiled offerings of digital asset securities.” The SEC’s order found that Blotics Ltd. “violated the anti-touting provisions of the federal securities laws by failing to disclose the compensation it received from issuers of the digital asset securities it profiled.”
The SEC’s press release went on to say that “without admitting or denying the SEC’s findings, Blotics has agreed to cease and desist from committing or causing any future violations of the anti-touting provisions of the federal securities laws, and to pay $43,000 in disgorgement, plus prejudgment interest, and a penalty of $154,434.”
Later that day, two SEC Commissioners — Hester M. Peirce and Elad L. Roisman — published on the SEC website a Public Statement titled “In the Matter of Coinschedule”.
In this statement, Peirce and Roisman expressed their disappointment with the fact that the SEC’s press release about the settlement with Coinschedule/Blotics did not “explain which digital assets touted by Coinschedule were securities,” and they pointed out that such an omission shows that the SEC is reluctant to “provide additional guidance about how to determine whether a token is being sold as part of a securities offering or which tokens are securities.”
They went on to say:
“There is a decided lack of clarity for market participants around the application of the securities laws to digital assets and their trading, as is evidenced by the requests each of us receives for clarity and the consistent outreach to the Commission staff for no-action and other relief. The test laid out in SEC v. W.J. Howey Co., 328 U.S. 293 (1946), is helpful, but, often, including with respect to many digital assets, the application of the test is not crystal clear.
“Although the Commission staff has provided some guidance, the large number of factors and absence of weighting cut against the clarity the guidance was intended to offer. Market participants have difficulty getting a lawyer to sign off that something is not a securities offering or does not implicate the securities laws; they also cannot get a clear answer, backed by a clear Commission-level statement, that something is a securities offering…
“In this void, litigated and settled Commission enforcement actions have become the go-to source of guidance. People can study the specifics of token offerings that become the subject of enforcement actions and take clues from particular cases; however, applying those clues to the facts of a completely different token offering does not necessarily produce clear answers. Providing guidance piecemeal through enforcement actions is not the best way to move forward; if the Commission intends to continue to do so, then we should at least be clear about which tokens we have identified to have been sold pursuant to securities offerings.”
On July 19, American attorney James K. Filan, who has been following the SEC’s lawsuit against Ripple, tweeted that the two individual defendants — Garlinghouse and Larsen — had written a letter to Judge Torres at U.S. District Court Southern District of New York “to inform the court of supplemental authority that supports the Individual Defendants’s pending motions to dismiss the First Amended Complaint.” The public statement by Peirce and Roisman was attached to this letter as Exhibit 1.
Later that, Jeremy Hogan, who has also been following and commenting on the SEC vs Ripple lawsuit, noticed Filan’s tweet and said that the public statement by the two “brave” SEC commissioners essentially tells Judge Torres that Ripple’s Fair Notice defense is applicable since in that statement — which he called “a gift for Ripple” — Peirce and Roisman are kind of admitting that not only did Ripple not have fair notice but nobody else has had one either.
And yesterday (July 21), Filan tweeted:
“It will be interesting to see how the #SECGov tap dances in its responses to the defendants’ filings about the Peirce and Roisman statement in view of the obvious infighting at the highest level of the Commission. The SEC needs to put its house in order.”
Hours later, Mark Sylvester, a lawyer for the SEC, filed a letter to Judge Torres in response to the letter (to the court) from the lawyers for Garlinghouse and Larsen:
Here is how Sylvester concluded his letter to Judge Torres:
“The Statement is neither relevant to nor dispositive of the SEC’s claims that Defendants violated the law. The Statement cannot serve as the basis to hold that the Constitution bars the application of the securities laws’ registration requirements to Ripple’s conduct.
“Nor can the Statement serve as the basis to dismiss the SEC’s claims that the Individual Defendants, with their own offers and sales and other conduct, aided and abetted Ripple’s unregistered offers and sales .
“While Defendants would have the Court look to speeches, the only relevant SEC action is that which the SEC took, upon consideration of all five Commissioners, to authorize the filing of this enforcement action to hold Defendants accountable for unregistered offers and sales of their digital assets to public investors.”
DISCLAIMER
The views and opinions expressed by the author, or any people mentioned in this article, are for informational purposes only, and they do not constitute financial, investment, or other advice. Investing in or trading cryptoassets comes with a risk of financial loss.
