Aug 10, 2023

The U.S. Securities and Exchange Commission (SEC) will file an "interlocutory appeal" of a judge's ruling on Ripple's programmatic sales of XRP.

Video transcript

The state of crypto is presented by Tron connecting the world to the power of Cryptocurrency. Good morning and welcome back to first mover. The SEC said in a court filing that the regulator will file an interlocutory appeal of a judge's ruling on ripples, programmatic sales of XRP. Joining us now to discuss is Michael Selig counsel at law firm Wilkie Farr and Gallagher. Welcome to the show, Michael. Good to be here. All right, walk us through what's going on here. I think that we were all expecting this appeal to come. What are some of the key takeaways? Yeah, it was expected, you know, it's, it's a game of chess here. So it's always hard to say, but uh many in the industry uh saw it coming essentially what's happening here is that there's still more to the ripple case that needs to be uh going to trial. And so there are these aiding and abetting claims and there are also remedies in terms of what the, the penalties essentially will be for the violations. Because if you remember the uh court did find that there were securities transactions in the case of the institutional sale and So all of that would still be going to trial what the SEC wants here is an appeal with respect to the judge's ruling on the programmatic sales, which were the sales on exchanges and blind transactions, uh which people have been characterizing as the retail transactions and then the uh distributions to employees and other um grant recipients. Um The court had found that those were not securities transactions and so the SEC wants to appeal those points uh and they're really focused on the, the, the district court split if you will. Um We had the Rao decision in Terraform a few weeks ago and we've also had a number of other uh cases that are kind of citing to that. So there's the Massy action um and that case has been referenced there. So there's really this, this dispute and, and the dispute comes down to whether and you should separate out the token which both courts agree is, is not in and of itself a standalone security or an investment contract. Uh But the uh Rakoff court essentially has said that you can't separate out the token from the economic reality of the protocols and other facts. And so it, it in a, in a sense kind of represents the investment contract. Um And then there's some case law supporting this, it's, it's a bit of a, a dispute as to, to, to what extent that uh holds, you know, if, if you take out certain facts. Does that change the analysis with respect to the token itself? But the, the key issue is going to be whether uh the analysis around uh the transactions that were separated out by Judge Torres was correct. Um And in particular, whether the third prong of the Howie test or uh the expectation of profits based on um the the efforts of others, whether that uh really led people, you know, it is satisfied with respect to these um programmatic sales and then whether an investment of money, uh another prong of the how he test was satisfied with respect to the distributions uh to employees. And if those, if the court, uh the appellate court were to take this inter locker to appeal up and decides that those prongs were not satisfied, it goes back down on remand to judge Torres. Um And, and she could very well determine that other prongs of the Howie tests are not satisfied. So this could be going back and forth for a bit. Um It's not necessarily going to result in XRP being deemed to be a security in all instances. So Mike, let's just nice to see you by the way, but let's just zoom out for a moment. Like what do you think is gonna happen here? Right? Because there were basically two reactions to the first decision, right? There were sort of like the ripple people and then various parts of the group who were like, yeah, it's it's great. We won and then there was like a whole other camp that was like, oh no, like we didn't win. There's a lot more to come. So I guess the question is, is like, what do you think is gonna happen? Like, what, what's, what's your prognosis here? I think it's possible that it goes back down on remand. You know, a lot of us have been really focused on this common enterprise prong uh for these uh programmatic sales, even if uh there is a reasonable expectation of profits based on the efforts of others, there's no common relationship between ripple and the purchasers. And so it's gonna be really tough in, in my view to get past that. And, and so I, I do think XRP ultimately is still uh deemed in these types of transactions to be a nonsecurity. Uh but it very well may go back and forth and, and go up to the Supreme Court. Um I think on the actual distributions to employees, the SEC itself and, and guidance is have taken the view when there's no bargain for consideration. Uh so that the persons that on the, the employee side are not uh contributing to an employee benefit plan for example, and receiving tokens or, or securities that that's typically not deemed to be um you know, a contribution of tangible and definable consideration. So I think it's gonna be hard as well for the SEC to back track on prior uh positions that it's taken. And also it's, it's not necessarily uh really clear in any case law. So I do think that issue actually could go in favor of ripple um right away. Um But the other, the, the programmatic sales, uh you know, it's a, it's a trickier issue just in that, I think other prongs of how he really should be analyzed. In that case, Michael, this partial win has already been referenced. In other cases. I think coin base most recently uh referenced this in one of their responses to the sec. How might the appeal affect all of these other cases that are now using this as a part of their arguments against various different regulatory bodies? The biggest impact is gonna be on Coinbase and Binance, the ca the whether this appeal uh goes one way or the other, it's gonna take a while. And so I don't know the, um you know, the timing is gonna be important here. Coinbase just filed its motion to dismiss uh a few weeks ago or last week. And so that's gonna be decided in the, you know, near term and like likely before there's any sort of appeal here. And of course, we also have to have the second circuit grant the appeal. So who knows if there will even be an appeal? I think the, the decision in coin base is gonna be important in terms of this motion to dismiss if it goes coin bases way that's gonna be even more pressure against the SEC because we've got now had another court uh really uh airing on the side that these tokens aren't securities. There may be instances where they're sold as investment contracts, but the, you know, the large majority of these transactions are not investment contracts. And II, I don't see AAA huge win for the SEC even on the appeal. I think this goes back down on remand and judge Torres has another opportunity to say that there's no common enterprise. Um Paul Gray Wall said essentially you can substitute any of the tokens and the, the coin based complaints uh for XRP and really the analysis holds. So I think uh Coinbase will continue to make that analysis with respect to the full um how we test and not just focusing on that one prong and they have strong arguments there. So I don't think this actually it no matter which way it goes is going to, to help the SEC here. I think Coinbase has all of the arguments. It needs to, to say that these are not securities. All right, Michael, we are going to have to leave it there. Thanks so much for joining the show. It was wonderful seeing you again. You as well. That was counsel at law firm Wilkie Far and Gallagher Michael Selig.

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