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Jeremy Hogan: Will Ripple's Fair Notice defense survive?


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Posted (edited)
15 hours ago, djdhrubs said:

I don't have time to read the whole document, but does it say when Ripple eventually went to see the SEC? They didn't in 2012-2013. Did they in 2014 onwards? You'd imagine they did, because otherwise it would be extremely weird for the SEC to bring a case against Ripple in late 2020 for their actions 8 years ago.

I agree with the opinion that Ripple are in a legal grey area and chose not to go talk to the SEC as they didn't wanna risk XRP being deemed a security even if they thought it wasn't. Not returning the SEC's call was likely nothing illegal. Dodgy? Sure. But does it lend any actual weight to XRP being a security? Nah.

On a more general note, I'll admit I haven't followed the court case that closely but the main purpose/ outcome of the court case is gonna be a decision about whether Ripple had fair notice or not, right? If they are proven not to have had fair notice, then Ripple win the case. Is that correct?

Or is the case actually going to conclude as to whether XRP is a security or not? I was under the impression that it wasn't going to come to an actual conclusion about that. Please tell me if I'm wrong.

If Ripple had gone to the SEC in 2012, no one would have known what the hell they were talking about.

SEC in 2012: Crypto-what? Sounds fishy. Don't do it.

Innovation summarily destroyed.

Edited by gamblin310
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I think that is just one part of Ripple's fair notice defense.  The issue as I understand it is:  would a reasonable person in the marketplace, give the totality of the circumstances, consider xrp to

I disagree with the assessment that Ripple was actively avoiding the SEC. Ripple was operating in a legal gray area and knew it and had experience with it. They also knew that clarity wasn't coming. I

As it has been with Google, Fakebook, AirBnb, Uber.    They may have asked themselves: Should we consider the privacy requirements of each individual country? Can we sell data to u

19 minutes ago, gamblin310 said:

If Ripple had gone to the SEC in 2012, no one would have known what the hell they were talking about.

SEC in 2012: Crypto-what? Sounds fishy. Don't do it.

Innovation summarily destroyed.

Hmmm, let’s do the outdated Howey test on a completely new, revolutionary asset class so we can determine it’s a security and regulate it as such. In effect hindering the usability of XRP in the network and IMO killing it. No thanks. 

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15 hours ago, djdhrubs said:

Or is the case actually going to conclude as to whether XRP is a security or not? I was under the impression that it wasn't going to come to an actual conclusion about that. Please tell me if I'm wrong.

Well it all depends, the SEC are suing Ripple the company, as well as Brad Garlinghouse and Chris Larsen as having sold unregistered securities. Basically, they’re saying they were selling investment contracts to the public (knowingly) and didn’t register the securities with the SEC, therefore violating the law of selling securities without first registering them with the SEC. 
We all know that’s bs because we know XRP is not an investment contract or “shares” of the company Ripple. They’re arguing that they also had fair notice that they were selling unregistered securities, which I think is bs because regulations have not yet been made clearly and extensively regarding crypto in the United States. FinCEN (Financial Crimes Enforcement Network), another government agency, deemed that XRP was a currency, (don’t remember when but I’m sure someone else does) so there’s also a conflict between governmental agencies about what XRP is. We are hoping that this case in turn leads to clarity and regulations regarding the space as a whole so we can move on and take part in this innovative space like the rest of the world has, including some third world countries.

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10 hours ago, Neurotoxin said:

Hmmm, let’s do the outdated Howey test on a completely new, revolutionary asset class so we can determine it’s a security and regulate it as such. In effect hindering the usability of XRP in the network and IMO killing it. No thanks. 

Honestly, I don't think there's anything majorly wrong with Howey test. It was explicitly made to be a set of principles that can be applied to new situations rather than a rigid, black and white, set of rules. All it needs is for the government to provide a little clarity as  to how it classifies crypto. It's been over a decade now, it can't be that hard.

Personally, I think tax law is a much bigger hindrance to crypto. In my view, it's the primary (but not only), reason why cryptocurrencies are almost exclusively used for speculation rather than payments.

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Posted (edited)
11 hours ago, Neurotoxin said:

We all know that’s bs because we know XRP is not an investment contract or “shares” of the company Ripple. They’re arguing that they also had fair notice that they were selling unregistered securities, which I think is bs because regulations have not yet been made clearly and extensively regarding crypto in the United States.

Just one nit pick. The fair notice thing is a defense put forth by Ripple, not a positive charge by the SEC. One of the general principles of the rule of law is that you should know, or at least should have known but didn't because of your own negligence, that you're doing something wrong. If no one knows that the action is wrong, you can't be guilty of it.

Take our mask laws for example. Your town comes out with a regulation that you must wear a mask covering your mouth and nose in public. So you put underwear on your head and go to Walmart (the one place you might not stand out) and the police arrest you because underwear on your head isn't a mask. Except whatever the police and lawmakers think, you had no way of knowing that your underwear wasn't a mask. It fit all the requirements laid out by the law and you couldn't have known otherwise. That's a fair notice defense. Maybe underwear really isn't a mask, but then either the law needs to be updated or the police need to make it publicly known to the whole town that that's how the they will interpret and enforce the law. You can't be guilty of what you couldn't have known.

One interesting note, the fair notice defense is an easier argument for Ripple than its other defense that it wasn't in fact selling a security. To be found not guilty because of lack of fair notice would mean that the SEC could simply, in the extreme case, issue fair notice that all cryptos are securities and prosecute anyone who sells them after that date.

While Ripple will use any argument necessary to be found not guilty, what it ultimately wants is the definition that XRP isn't a security.

Edited by brianwalden
We should all wear underwear on our heads in support of Ripple.
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What do you guys think about this response to Ripple’s fair notice defense by the SEC? Doesn’t seem very compelling to me considering the cases they cited are not really as similar to this case as the SEC wants the court to believe.

@Pablo You’re a lawyer (right?), what are your thoughts?

8D4692D8-69D6-4809-B2B7-81EEA8FB0A5C.png

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Please court don't allow the fair notice defence to win, as you should know by now we are corrupt Self Enriching Criminals and if that defence gets a positive ruling then it will really upset our potential future revenue streams, sorry we mean business model, did we say that out loud, sorry we mean investor protection actions!

In my expert opinion NO CASE, BS and more stalling for friends in high places, plus of course, they need paying off.

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6 hours ago, Neurotoxin said:

What do you guys think about this response to Ripple’s fair notice defense by the SEC? Doesn’t seem very compelling to me considering the cases they cited are not really as similar to this case as the SEC wants the court to believe.

@Pablo You’re a lawyer (right?), what are your thoughts?

8D4692D8-69D6-4809-B2B7-81EEA8FB0A5C.png

Er, that seems like a very childish reply, or is it just me? That's not what Ripple said. They made a clear distinction between 1. Digital asset companies dealing in stock and 2. All the other cases relating to ICO's. So there are these two fundamental differences between Ripple's case and the other 75 cited in that document.

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45 minutes ago, djdhrubs said:

Er, that seems like a very childish reply, or is it just me? That's not what Ripple said. They made a clear distinction between 1. Digital asset companies dealing in stock and 2. All the other cases relating to ICO's. So there are these two fundamental differences between Ripple's case and the other 75 cited in that document.

Yeah, this whole response has me scratching my head as to what’s going on here. 

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With some of the recent wording in the SEC letters, you can tell how much is riding on this case for that agency. Literally billions in future business model revenues at stake for them. 

Pretty epic game of chicken happening. Problem for us is of course that this is giving more than enough time for Ripple's competition to copy their work. I still see more at stake for Ripple because even if the SEC screws themselves IRT future crypto enforcement actions, there is always another billion dollar securities fraud case out there somewhere. 

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34 minutes ago, RipMcGillicuddy said:

With some of the recent wording in the SEC letters, you can tell how much is riding on this case for that agency. Literally billions in future business model revenues at stake for them. 

Pretty epic game of chicken happening. Problem for us is of course that this is giving more than enough time for Ripple's competition to copy their work. I still see more at stake for Ripple because even if the SEC screws themselves IRT future crypto enforcement actions, there is always another billion dollar securities fraud case out there somewhere. 

Ripple have Ripplenet, which is taking over from SWIFT and their foot in the door to the Fintech community. Their offices are in all the fintech hotspots, they are talking with central banks and MMs.  Yes SEC case have caused them harm, but it has also put them in a spotlight and made them better known. R3 might be big competition, but Ripple has many advantages and with FLR smart contracts it is now even stronger.

Ripple XRP are here to stay.

Edited by Julian_Williams
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On 6/1/2021 at 12:02 PM, brianwalden said:

I first bought XRP in 2014, before Jed left. I distinctly remember Ripple actively teaching people that XRP wasn't an investment in Ripple - they had private stock sales for that. The way they described their founding was that they did everything they could to avoid the things that would make XRP a security, but they knew the risk was always there because the law wasn't clear. Maybe they went on to make promises when they sold to business partners or big OTC sales, but they were doing everything they could to make clear that XRP in and of itself had no promises attached.

In the early days Ripple was distributing XRP for non-cash considerations in order to build liquidity, somewhat analogous to the Howey test of investors investing and expecting some kind of return on their money/investment.

Was Ripple holding ICO's or fundraising like Ethereum? No. But they were giving something away (that could have future potential for both parties) in order to build out their network infrastructure. I can see that as a kind of investment, even if you need to twist logic a bit to get there. 

Unfortunately for the SEC, I don't think the laws as written really fit the Ripple situation, if we're talking about selling/investing in purely literal terms. One of Ripple's arguments is that they didn't actually 'sell' anything to anyone, and they weren't selling their stock, etc. I guess Fair Notice is their strongest argument but there's a lot of holes already in the SEC case so...

The SEC should have asked Congress to make a new law or wrote a new regulation themselves (if that's even possible), not gone down the path of enforcement by applying old, outdated precedents to ground-breaking situations, twisting all logic and words to make it fit in the SEC enforcement box.

Don't get me wrong, eff the SEC. I still think their case is non-sense.

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I've mentioned several times that there are lots of parts to this case that could create real headaches for both the SEC and the sector if the parties go to trial and a judgement is issued.

The fair notice defence is just one of the elements that I'm watching with interest even though I have to say that the idea that one can claim as a defence the fact that regulators, who mainly operate on threadbare budgets, never got around to prosecuting you seems rather weak and offends my lawyer's commonsense principles. That's why we have limitation periods. If the parties don't manage to settle, Judge Torres would need to thread a needle between the well established principles of limitation periods while protecting the legitimate need for a Fair Notice type of defence. Only the lawyers would enjoy that spectacle. And it will be so convoluted and loaded with caveats no one else could make use of such a judgement.

What happens if Ripple is successful in the defence? Do they get immunity for future conduct that would otherwise offend the Securities Act? Can they continue to behave as they did previously even though the courts have told them such sales offend the Securities Act today? Of course not.

If they are talking about past misconduct and are relying on the defence only for that past conduct - sure - that makes sense. But that doesn't really solve our problem does it? And by "our problem" I mean Ripple's problem and that hanging over the whole industry to clarify the rules applying to future sales of tokens such as XRP, ETH, DeFi tokens and others. To solve that, both parties still need to go to the negotiating table and bash out a compromise.

Just to be clear, if Ripple is successful with their fair notice defence, the securities law issues remain alive for future sales unless the court also rules that Ripple's sales were not, and are not, sales of investment contracts. But if that were true, the defence becomes moot. The Fair Notice defence is actually a backstop - it only makes sense where the court has decided that Ripple's sales of XRP were indeed investment contracts.

Maybe this opens a path for a "Ripple Rule" to be created. I still haven't seen a formulation of this rule in any of Ripple's submissions. The idea that you approach courts to make a new rules isn't something done lightly. It takes the legal system years (and many appeals) to develop new rules or principles. With the speed of regulations worldwide, the Ripple Rule could be in danger of becoming a footnote rather than a headline. Maybe the rule will come out of the settlement negotiations. That's a possibility too.

Edited by Pablo
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