Headline: What is going on with Ripple?

Body:  It is said that if you drop a pebble into a still pond, the ripples could spread out almost without end.  Such seems to be the case with the cryptocurrency, Ripple.  Let’s take a look.

OK, what IS happening in the grand scheme?

In the grand scheme, two men (Mr. Larsen and Mr. Garlinghouse) started Ripple then engineered an ICO.   They used their own coin (XRP) to gain goods and services to expand Ripple; Allegedly, the two made over $1.3 Billion USD selling these “unregistered securities.”

I think I’ve seen that movie before.  Why is the SEC making such a big deal?

Alright, time to get into the wayback machine, destination, the 1930s.  The stock market was a fairly new thing, and people were of an opinion to like the new-fangled thing  So did fraudsters, and often for the same reasons.  So, Congress passed the Securities Acts of 1933 & 1934.   In short, the 1934 Act started the agency the SEC, and outlined the attributes of a security.   It was mandated that when  a security is offered, several disclosures have to be made, in a Registration Statement.   There are some regulations that will render an offering exempt from these registration requirements, but Ripple appears not to qualify for these exceptions.                                                                                                    

“Issuers seeking the benefits of a public offering, including access to retail investors, broad distribution and a secondary trading market, must comply with the federal securities laws that require registration of offerings unless an exemption from registration applies,” said Stephanie Avakian, Director of the SEC’s Enforcement Division. “We allege that Ripple, Larsen, and Garlinghouse failed to register their ongoing offer and sale of billions of XRP to retail investors, which deprived potential purchasers of adequate disclosures about XRP and Ripple’s business and other important long-standing protections that are fundamental to our robust public market system.”

So, what is the big question here?

The big question is whether or not the XRP tokens constitute a security under existing law.  For sure, there are exceptions to registration, but it would appear that they do not fall under the requirements for either of these very few exceptions (loopholes?)  We shall see.  The silent part that is not to be read aloud, is that the SEC, after a win, would be the sheriff of future cryptocurrency offerings.    This would  naturally lead to an increased budget for the SEC, and that is worth fighting for.   Isn’t it?   If it is instead classed as a commodity, the dreaded CFTC would get a sizable piece of this new federal pie.

So, who else is involved in this circus?

In the ring nextdoor is the Chamber of Digital Commerce (The other CDC) which filed an amicus brief to support Ripple.   In the brief  they explain to the Court how incredibly important it is to finally answer this most vexing question. Many third parties have offered supporting documents to the court, including The Blockchain Association, Coinbase and  ICAN.  Others are piling on in social media forums, especially Twitter.   Ripple’s counsel went online and made the case that XRP tokens do not satisfy all of the 4 prongs of the Howey test, as prescribed in the Supreme Court decision.  (I promise to not go too deep here.) 

The Howey test consists of four elements often referred to as prongs. According to the test, a transaction is a security if it is (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profit, or (4) to be derived from the efforts of others. All four test conditions must be met, and the test can only be applied retrospectively.  See?  Not too bad, right?  (Now, you know why Howey might rhyme with “owie.”)

The Verdict

It would appear that the case continues to be fought.   But, before the case is actually “heard” there will definitely be years of “motion practice” where procedural details related to the case are ironed out, and it would appear that Ripple just won a pretty major victory in one of these small duels.  I guess the moral of the story is that the law is a continually evolving thing, unfolding as it has to in response to new business practices.  This is likely as it should be, and we should all be patient to see what happens.   BTW, I think there’s going to be an upcoming, exciting ICO!!  It’s called “K-coin.”     My slogan might be, “Have your K, and eat it too.”  (My marketing materials are being worked on right now.)  What do you think?

 REFERENCES

SEC.gov | SEC Charges Ripple and Two Executives with Conducting $1.3 Billion Unregistered Securities Offering

SEC vs. Ripple (investopedia.com)

The SEC vs. Ripple lawsuit: Everything you need to know (cointelegraph.com)

Why the lawsuit against Ripple and XRP is a landmark case (cryptoforinnovation.org)

 Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.