On 18 August, the United States Securities Commission (SEC) proposed a new set of encrypted asset financing rules to provide a clearer distribution path for investment contracts that partially involved encrypted assets. According to Bill Morgan, a lawyer who had long followed the Ripple case, the foreign source argued that the proposal might mean something to Ripple, not to the extent of the financing exemption but to a conditional safe harbour clause.
Proposal includes financing exemptions and safe harbours
The new framework, known as the Rules for the Regulation of Encrypted Assets, is used to regulate the arrangements for the issuance of securities that apply to some encrypted projects when they are financed in the United States, as published by the SEC. The report mentions that the proposal sets a two-tier exemption path: a maximum of $5 million in four years and a maximum of $75 million per year.
The proposal also includes a conditional safe harbour. If the issuer can prove that the “critical management effort” it committed or relied upon previously in the investment contract has been permanently stopped, the relevant encrypted asset can be removed from the original investment contract framework under certain conditions. The securities registration requirements at the cantonal level will also be excluded.
The proposal is currently in the 60-day public consultation period.
The level of financing is of limited appeal to Ripple
Bill Morgan argued that a monetary financing exemption would be of little help to Ripple itself. The reason for this is that Ripple currently released the XRP on a monthly basis from the escrow account on a scale of approximately $300 million, which is significantly above the annual ceiling of $75 million in the proposal.
He also indicated that Ripple was not entirely short of existing financing instruments. According to her, Ripple had allegedly been granted the SEC's “behaviour immunity” last year, and could therefore still rely on the existing Rule 506 exemption for private securities issued to institutional investors.
Safe harbour is the key to XRP.
Morgan believes that the proposed safe harbour arrangement deserves real attention. If Ripple wants to use this clause, it needs to be formally recognized that key management efforts related to XRP have been permanently terminated. As a result, the Court had previously concluded that new processing space might theoretically arise from the investment contract made for the sale of parts of Ripple.
He noted that Ripple had shifted more of its focus to RLSD over the past 18 months and had completed several acquisitions. These changes may be used to illustrate that the current core business of the company is no longer developed and advanced around the XRP itself.
In Morgan, it appears that most of Ripple's current activities are closer to what the SEC calls “non-critical activities after functional completion”. This is one of the reasons why Ripple has recently made less new commitments or new formulations about XRP.
However, the article also mentions that the larger question now is not whether the XRP will be considered a commodity in the future, but whether Ripple can legally sever the link between its historical institutional sales and investment contract determinations.