Ripple complied with Judge Torres’s order in the XRP lawsuit and released a series of 2012 documents from the law firm that included the company’s “legal analysis and advice” regarding XRP’s decision to hold an ICO.
The documents in question were created by the law firm “Perkins Coie” at the time and stated that the US Securities and Exchange Commission may consider the sale of “Ripple Loans” illegal. In a February 2012 memo, attorneys for Perkins Cole LLP law firm advise against selling coins to Ripple. The second note from the same company in October 2012 warns that XRP may not be considered a security under federal law, but the SEC may approach the issue differently:
“While we believe a convincing argument can be made that Ripple Loans do not constitute “securities” under federal securities laws, there is a small caveat that, due to the lack of applicable case law, the Securities and Exchange Commission (“SEC”) would not agree with our analysis. We believe there is a risk.
The more the Founders and Company promote Ripple Credits as an investment opportunity, the more likely the SEC is to take action and argue that Ripple Credits are “investment contracts” and therefore securities under federal securities laws.”
Why are these documents important?
The lawsuit between the SEC and Ripple has been ongoing since December 2020, and “fair notice” is one of Ripple’s core defense strategies. In summary, the company argues that the SEC did not issue a warning before filing a lawsuit.
At the same time, the SEC tries to dwarf the argument by claiming that they shouldn’t have to explain the law to each company individually. In other words, the prosecution is based on the principle that ignorance of the law is no excuse.
The law firm’s analysis clearly states that if the company adheres to certain rules (explained in detail in the document), it is “unlikely” to come under scrutiny. However, the report also warns Ripple of the risks associated with a “lack of applicable case law.”
So does this warning break the fair notice defense? The answer is still not entirely clear. The documents paint an overall positive picture for Ripple and individual defendants, according to attorney James K. Filan:
“The first note was prepared in February 2012 and sent to Jed McCaleb and Jesse Powell. It is stated that if NewCoin is sold, it will be seen as a security. However, Ripple later revised its business plan and asked for a new recommendation from Perkins Coie, who published a second memo in October 2012. This second note was sent to Chris Larsen and Jed McCaleb. The October rating is more positive and concludes that there is a small risk that the SEC will disagree, ‘Ripple Loans’ should not be considered securities. The note also suggested some steps that Ripple could take to minimize risks regarding the SEC.”
Finally, after the documents in question were made public, Ripple CEO Brad Garlinghouse said that “the truth is out there for everyone to see”.