Slim chance of Ripple IPO in 2020

“In the next 12 months, you’ll see IPOs in the crypto/blockchain space. We’re not going to be the first and we’re not going to be the last, but I expect us to be on the leading side… it’s a natural evolution for our company.” So said Ripple CEO Brad Garlinghouse at the Davos World Economic Forum back in late January – at which time he may have been hopeful that a class action lawsuit (Vladi Zakinov et al v. Ripple Labs el al) brought by Bradley Sostack would soon be dismissed at the request of Ripple Inc’s lawyers in a Federal court hearing scheduled for late February. The effect of the announcement on the XRP price was immediate – rising over 40% in the three weeks after Davos.

The XRP price rose from US$0.21 to US$0.32 in the 3 weeks after Davos (source BNC Market Data)

Unfortunately for Ripple Inc, the case wasn’t dismissed. Like so many other Ripple lawsuits, Mr Sostack and his co-litigants were arguing that Garlinghouse, Ripple Inc and XRP II LLC had embarked on a scheme to raise hundreds of millions of dollars through sales of XRP – which they say is an unregistered security – to retail investors in violation of the registration provisions of federal and state securities laws. If the court was to agree, the applicants wanted damages – and as the suit was on behalf of “all investors” the amount in damages could be very substantial.

While the court did not agree to dismiss the case outright, it did advise Sostack that his case was light on specifics – and his lawyers needed to provide far more detail with regards to exactly how the defendants were allegedly liable. Perhaps unexpectedly, that is exactly what happened, with a revised suit being filed in March that alleged Garlinghouse had quietly sold off 67,000,000 XRP for cash and other crypto assets during 2017 – while at the same time presenting himself as holding XRP for long term gains.

Any hope that the various Ripple lawsuits would be wrapped up quickly fell away with the arrival of Covid-19 and the postponement of all civil cases in California courts from late March to early May. Since then Ripple has had a win on May 28th – managing to get the California Federal courts to agree to fold another similar case (Bitcoin Manipulation Abatement LLC v. Ripple Labs) into the Sostack case, which means the company won’t have to fight multiple cases simultaneously. While a Federal District Court decision in the Sostack case would not set a precedent for state cases in the US, it would at least be persuasive. Put simply, if Ripple Inc can prevail in this case it would make all similar cases much harder to bring.

With regards to Zakinov et al v. Ripple Labs, Ripple’s lawyers have stayed on the case – requesting in June that the court ‘trim’ many of the allegations – a move strenuously opposed by Sostack’s lawyers at a hearing on July the 9th – for which a decision is still pending.

Impact on a Ripple IPO date

From the perspective of a Ripple IPO, a decision in this lawsuit is critical for two key reasons. The first is because if the court rules against Ripple Inc and says XRP is a security, then the company will be faced with a potentially massive damages bill – which would be a disaster for the whole project – and holders of XRP tokens (a point Ripple Inc lawyers have been none too subtle about making).

At the same time, if Ripple’s XRP token was classed as a security, then how could RIpple Inc launch another IPO while steering down the barrel of a potential SEC enforcement action? Although Ripple Inc is adamant Ripple and the XRP token are two different things, that’s a message that is still unclear for many investors. All this said, the chance that the SEC would take the type of action against Ripple as it did against smaller crypto projects Airfox and Paragon (forcing them to repay investors) in late 2018 is very unlikely – as the Commission views July 27, 2017 and the publication of its ‘Dao Report’ as the time ICO issuers had been sufficiently warned they were crossing a securities law line. Court documents record the first XRP sales, however, as having taken place as far back as 2013.

The second important reason is that a court decision that Ripple is not a security would then mean the entire value proposition of the company would revolve around the success of its RippleNet – a set of tools designed to improve global value transfer systems especially as it pertains to financial institutions and businesses. But as Forbes contributor Jason Bloomberg points out in his 2019 “Is Ripple A Scam” Forbes article, it’s unlikely that RippleNet has impressive cash flows. All would be revealed, however, if Ripple Inc was to file paperwork for an IPO with the SEC – as to do so would require the lodging of an S-1 form with the Commission. As part of that process, all Ripple Inc revenues and operating costs must be made open to the public – in addition to thorough disclosure relating to its business plan and potential future performance. At the time of writing Ripple Inc has not lodged an S-1 with the SEC.

In fairness to Garlinghouse, he did say that Ripple Inc was not going to be the first major crypto player to file for an IPO – so what of the others? Certainly, there has been no shortage of noise about potential IPOs from major players like Coinbase and Robinhood, but to date, neither of them has filed an S-1 with the SEC either. With three to six months being the average time that passes between filing an S-1 and actually going public, time is fast running out in 2020 for any major crypto IPOs.