Attorney Hogan Discusses what an SEC v. Ripple SETTLEMENT Would Look Like and the Effect on XRP!

Hello and welcome to Legal Briefs. All crypto, all XRP, all the time apparently. This is attorney Jeremy Hogan and today we are going to talk about settlement of the SEC versus Ripple lawsuit because everyone is talking about settlement. Usually followed by a strange reference to a lunar landing or Italian sports car. But what would that look like if settlement and what would that mean to Ripple and to XRP? Stick around, all of your questions will be answered. Now, as you may know, the whole lawsuit revolves around whether XRP is a security and the seminal case in the United States is the SEC versus Howie case, which involved the sales of Orange Groves, which were deemed securities by the U.S. Supreme Court. Now, just like the good teacher I used to be, today we are going to take a field trip outside because in the field is the best place to learn. Did you know that the Howie test, which is the test for whether something is a security or not stems from the sale of Orange Groves in a town in Florida called Howie in the Hills? And Howie in the Hills happens to be 20 minutes from my house, so let's go take a look. Behind me, you'll see the infamous Howie Orange Groves, which Howie sold to unsuspecting New Yorkers and the court said, no, you are selling a security, selling these oranges. As you may know, Ripple thinks it can turn the Howie test into the Ripple test with a victory at court. I, however, have a much easier and simpler way to do it. Let's get the heck out of here. And that's how we do it, street lawyer style. So the SEC regulates companies in the U.S. by something called selective enforcement. The SEC can't sue every market participant involved in violations of securities laws, so it files select lawsuits on issues that will send a message to other market participants. That's the idea. It's like being a parent. You randomly spank one of your kids for doing what all the others are doing just to keep them in line. Anyway, and in regard to the crypto industry, you can see that there have been surprisingly few lawsuits filed by the SEC, and the lawsuits that are filed are parsed over by private securities lawyers and used in opinion letters to crypto companies saying, you know, don't do this or make sure you do that. Now, looking at this chart, you can see the number of crypto-related lawsuits filed by the SEC really picked up in 2018. What we are looking at is the pastel green-blue color, and those are lawsuits filed. And you can see in all of 2020, 17 crypto lawsuits were filed of various types. Some were fraud, some were very small coins. The big one, of course, was the Ripple lawsuit. But the truth is that most of the companies or individuals that were sued either threw their hands up and said, got me, and consented to judgment, or fought the charges but quickly realized they were going to be ran into the ground and they couldn't afford the millions of dollars that it would take to fight the lawsuits. Or in some other cases, the SEC was able to get a judge to sign what's called an emergency injunction, which essentially freezes your bank accounts and makes it impossible for you to fight because you have no money. So we really only have a handful of examples as far as settlements, and none of them from a company in the position Ripple is in currently. In fact, the only companies that really had the resources to fight were Telegram and Kik Interactive, and they ended up losing. Now, once they lost that summary judgment, Kik Interactive smartly used whatever bargaining power it had left to agree to terms with the SEC. But by that time, Kik had kind of the same bargaining power that Hirohito had with the Americans at the end of World War II, not much. So the judgment in the Kik case was essentially in three parts, and let's take a quick look at it. The first part is Roman numeral one, and it says that, quote, the defendant is permanently restrained and enjoined from violating section five of the Securities Act, et cetera, et cetera. Now, I laughed when I read this because it's basically saying Kik is enjoined from breaking the law again, which is just kind of silly. So I assume that's something that the SEC insists on for some reason. Now, the second part of the judgment, which is Roman numeral two, was more interesting. It requires Kik to give the SEC 45 days notice before selling any more of the KIN coins. But even more interesting is this, quote, nothing in this paragraph requires defendant to provide the commission with any information beyond the notice. Notice what the judgment does not say. It does not say that the KIN coin is a security. It does not say that Kik could not sell more KIN coins. Now, why is that? Because the coins themselves are not inherently securities or not securities. If that was not true, the language in the judgment would make no sense. So Kik was able to negotiate that language that would essentially allow it to sell the KIN coin even after the judgment. And in fact, the KIN coin was and is still sold on many exchanges and no one else to my knowledge has been sued or gotten in trouble for it. And finally, the third part of the judgment was a penalty or fine of $5 million and it was paid to the state. And I believe those are the funds the SEC uses to operate. So, quote, defendant shall satisfy the obligation by paying $5 million to the SEC within 30 days. And of note in the Kik Interactive case, there was no disgorgement of money from Kik Interactive with the money to be returned to investors. This sets it apart from, for example, the Telegram case in which the company had all monies disgorged to the tune of $1.2 billion and a fund was set up for purchasers to recover some of their investments. So that is what we have to work with, just a handful of consent judgments, none of them really analogous to what's going on with Ripple, but I think it does give us a framework for what a settlement would look like. So let's do some conjecture, shall we? Let's say you're the SEC's lawyer and you were told to file this lawsuit by the outgoing head of the department. You're not sure why after nine years, but you do as you're told. Now, what do you want in a settlement? First, you want to walk away without damaging your street cred with other crypto companies. You don't want them to think their ICOs are all good because of this settlement. So yes, you do want the language enjoining Ripple from any future illegal sales. What else do you want? You want a civil penalty. Why? Because that shows that Ripple did something wrong. Now, also, it's essentially where the money comes from that pays for your friends' salaries. Still, staying with the SEC, the next part of your thinking is more difficult. You, the SEC lawyer, are ostensibly supposed to be protecting the main street, the investors who were scammed. The problem is because your agency waited nine years, XRP has changed hands millions of times. In other words, there's just no way to fairly disgorge profits to investors because there's no way of fairly knowing who to disgorge to. Now, how would you even come up with a plan to disgorge, say, a billion dollars that Ripple pays? Who would you give it to? Plus, there's that small problem that it was literally your lawsuit that caused the damage. Very awkward. Okay, enough of the SEC side. I can literally feel the humanity being sucked out of me. Let's switch sides to Ripple. Now, what does Ripple need in a settlement? First, it needs to be able to maintain its business. Paragon was sued by the SEC and basically drove out of business, and so that's not going to be happening with Ripple, and that will be the most important issue. So if a penalty is imposed or if there is disgorgement of profits from sales, it will have to be at a level that does not bankrupt the company. For me, that would be like $100. For Ripple, I don't know. We do know that, per the complaint, Ripple sold approximately $1.38 billion US dollars of XRP between 2013 and the lawsuit. So that's from looking at paragraph 79 and 80 of the amended complaint. But whatever number we might see in a settlement, I can guarantee you that it will be a number that Ripple can afford without going out of business. Now, second, Ripple needs some clarity moving forward. It needs to know, and importantly, secondary markets need to know that this whole SEC thing is over. In fact, Ripple's on-demand liquidity product is based in part on there being a liquid secondary market. So this is going to be very tricky for Ripple, but it was helped in large part by the SEC making the lawsuit, not just about sales of past XRP, but also about current sales. Here's why. So generally speaking, a lawsuit settlement includes all relevant terms of settlement. And especially if the defendant is paying money, the consideration from the plaintiff will be a dismissal of the lawsuit. And since the SEC has apparently included current and even future sales of XRP, the dismissal would effectively end the litigation over even future sales of XRP. But what about the secondary markets? Now, that's the trickiest part for Ripple because the SEC will never agree not to sue the secondary markets, the exchanges. It really can't. So Ripple's left with the only option for them is to include terms which make it clear that the penalties are in effect through only a certain date. For example, a clause that states that Ripple will pay penalties for sales of securities from 2013 through 2017, or otherwise make it clear that sales, at least from the final end of the lawsuit forward, are not sales of securities. Now, that is the most clarity that the exchanges will get from a settlement. But I argue that is pretty good clarity, probably enough to get the lawyers on board with relisting XRP. And if Ripple is nervous about the potential outcome of the case, I can even see them agreeing to pay a percentage of any sales of the escrowed XRP, or if you wanna get really deep state thinking, Ripple could even agree to confiscation of a certain amount of the escrowed XRP to the state. Now, maybe that's a little fringe conjecture, but here's something that's not. Ripple is apparently at a place business-wise where it could likely afford to make sales from escrow to only accredited investors or to corporations thanks to its on-demand liquidity product. Now, this might make the SEC feel better about the public sales from Ripple because Ripple seems now to be in a position to do that. Look at this from a May 2021 Cointelegraph article. The company also reported that over the quarter, 3 billion XRP has been released from the escrow holdings while 2.7 billion XRP have been returned to new escrow contracts. So Ripple is re-escrowing the large percentage or a large percentage of the XRP that it holds in escrow and maintaining its business functions from sales to its ODL customers. And those customers are bank and money transfer services, et cetera, not exchanges, not Joe Public. These are private purchasers. So if that's true, it puts Ripple in a good position to agree to only private or Section D sales to accredited investors. So in summary, I believe that a settlement agreement would likely include Ripple paying a penalty, but a penalty specifically limited to dates pre-lawsuit. A settlement would likely not include disgorgement of profits to purchasers because of the impossibility of figuring out how to disperse the funds. A settlement could also very well contain a term which includes limitations on the sales of XRP released from escrow. Now, if you think things through, a settlement similar to what I've outlined would do a couple things. It would satisfy Ripple's concerns, namely maintaining its business and ODL practice. The next effect would be to give the exchanges the confidence to relist XRP. They just need a little push. For example, I don't think the Kik Interactive coin, the Kin token, was even ever delisted. So the exchanges just need a little push and I'm confident that a settlement as outlined would lead to a relisting of XRP en masse. The next thing, and maybe the most conjecturish, is the agreement to limit sales to private sales in companies and clients. This would in effect limit or slow the flow of XRP into the marketplace. Sales to Section D or corporate purchasers cannot then be put into a public exchange for I think six months, maybe up to a year. So a settlement containing this term would essentially bottleneck the flow of XRP into the market for years to come. And finally, the settlement would put XRP in the clear as far as securities violations and such. Ripple would be the first crypto company to be 100% in the clear from the SEC. And that's what I put together for reviewing the Kik and Telegram cases and from settling hundreds of cases myself. I hope you enjoyed my conjecture. Remember from our field trip earlier this video, you can look up anything on your computer nowadays, but nothing, nothing beats getting out into the world and seeing it and feeling it yourself. Just Google the word love and I'm sure you'll agree. Thanks for watching.