By: Taher Kameli & Steven Burke
As discussed in our previous post, the Law Offices of Kameli and Associates believes that, strictly speaking, the SEC correctly determined that XRP qualifies as an investment contract under the Howey Test and therefore as a security under the Securities Act of 1933. However, that is not to say that the case is cut-and-dried; indeed, we find the lingering questions to be far more interesting and arguably more significant than the rather predictable outcome of the Howey Test.
The Birth of a Titan: How the SEC Came to Control U.S. Securities and Markets.
In the aftermath of the Wall Street Crash of 1929, Congress sought to reestablish public confidence in U.S. markets with the passage of the Securities Act of 1933 and the Securities Exchange Act of 1934, the latter of which officially created the Securities and Exchange Commission. From its inception, the SEC has been tasked with a three-part mission: (1) protect investors, (2) maintain fair, orderly, and efficient markets, and (3) facilitate capital formation.
Summarily, the SEC advances its triumvirate mission by requiring public companies, fund managers, and other investment advisors “to regularly disclose significant financial and other information so investors have the timely, accurate, and complete information they need to make confident and informed decisions about when or where to invest,” and by overseeing the U.S. securities markets and the primary participants those markets (e.g. brokers, dealers, exchanges, and investment advisors). Notably, to be effective, the SEC must take action when sufficient disclosures are not made to investors and when market participants otherwise violate the rules.
Advancing Its Mission Through Action Against Ripple.
Although the various portions of the SEC’s mission often overlap, the thrust of the SEC’s enforcement action against Ripple appears to arise from its mission to protect investors. Specifically, the central argument in the SEC’s complaint alleges that Ripple withheld vital information about XRP from investors seemingly to the benefit of Ripple and Ripple insiders. However, according to the SEC’s complaint, Ripple raised over $1.38 billion through the sale of over 14.6 billion XRP to investors that lacked sufficient information to evaluate their investments. Taken at face value, it would be reasonable to consider the SEC to be implying that XRP was sold at an average initial price of $0.0945[1]. Accordingly, with XRP trading between $0.50 and $0.57 the day before the SEC filed its complaint, one could reasonably wonder from
[1]This crude estimate is solely intended to be illustrative, and actual sale prices varied significantly due to factors such as market rates and institutional investor discounts; moreover, this estimate does not consider the volume of XRP sold at various price points, which, from 2013 to 2020, ranged from $0.002 and $3.84.
what exactly the SEC was protecting investors. Notably, the SEC does not act in a bubble and cannot simply ignore violations of the Securities Laws when the investment ends up being successful. However, it is difficult to ignore the fact that thousands of XRP investors went so far as to file a motion to intervene in the lawsuit as third-party defendants. Although ultimately dismissed by the court, the would-be interveners sought to protect their interests in XRP and blamed the SEC for the multi-billion dollar losses that XRP users experienced in the days following the SEC complaint. Despite the ongoing litigation, XRP’s value has not only recovered but actually exceeded that at which it was trading in the days before the SEC filed its complaint. Perhaps this unexpected development may be explained by the crypto-community’s growing resentment for the SEC, and its willingness to support Ripple in this fight.
Citations
[1]This crude estimate is solely intended to be illustrative, and actual sale prices varied significantly due to factors such as market rates and institutional investor discounts; moreover, this estimate does not consider the volume of XRP sold at various price points, which, from 2013 to 2020, ranged from $0.002 and $3.84.
