Here’re why SEC claims XRP is a security is nonsense
On April 9, Jeremy Hogan, a lawyer at the American law firm Hogan & Hogan, who has been closely watching and commenting on the United States Securities and Exchange Commission (SEC)’s continuing case against Ripple, explained why XRP should not be deemed a security.
In a series of tweets, Hogan clarified that XRP could only be called security under an “investment contract.” He noted that the SEC utilizes this word in their arguments as well.
An “investment contract” analysis is governed by the “Howey” case and progeny.
The “test” in the case (investment in a common enterprise with expectation of profits from efforts of others) was in response to a lower court opinion that a “speculative” investment was required. pic.twitter.com/07hOLcp0EC
— Jeremy Hogan (@attorneyjeremy1) April 9, 2023
The “Howey” case and its succeeding cases regulate an “investment contract analysis.” The Howey test assesses if an investment is in a joint venture with a profit expectation from the efforts of others.
Hogan went on to say that the SEC has failed to show that there was an inferred or explicit investment contract in the Ripple case. Instead, he claims that they have exclusively concentrated on the acquisition deal. But, Hogan claims that a simple purchase cannot be deemed an “investment contract” because Ripple is under no duty to do anything other than transmit the asset.
He underlined that all of the “blue sky” instances relied on by the Howey case to define an “investment contract” involved some type of investment contract. Hogan questioned how a person might “reasonably rely” on an offeror to make a profit when the offeror is not legally obligated to deliver.
Hogan determined that the question is not whether Ripple used money from XRP sales to fund its business but whether the SEC can prove an implied or explicit “contract” between Ripple and XRP customers regarding their “investment.” There is no such contract, according to Hogan.
On April 2, John Deaton, another well-known and respected attorney monitoring and commenting on the SEC’s action against Ripple, provided his thoughts on why XRP and ETH should not be deemed securities.
Deaton, the Managing Partner of Deaton Law Group, is the originator of CryptoLaw, a website focusing on US legal and regulatory developments for digital asset holders, and the host of the CryptoLaw YouTube channel.
Deaton outlined the main ideas of securities and how they apply to digital assets in a Twitter thread to his 258K followers. Deaton began by discussing the frequently misinterpreted legal term “investment contract” and the misuse of the Howey Test on social media. He referred to the Securities Act of 1933, which defines “security” but does not specifically mention digital assets or software code. Deaton contends that the key phrase in SEC cases involving digital assets such as Telegram, Kik, LBRY, and Ripple is “investment contract.”
According to Deaton, a digital asset or cryptocurrency (software code) is not a security in and of itself, according to the Howey Test. However, he recognizes that it can be marketed, offered, or sold as an investment contract, which is a security. Deaton emphasized that the GRAM token, XRP, and ETH are not securities, even though the ETH ICO was unregistered. Ripple may have marketed or sold XRP as an unregistered security on occasion.
He underlined that the fundamental asset – digital code – is not a security and that there has never been a case in US history in which the secondary sale of that asset was ruled to be a security. Deaton utilized the Howey Test to demonstrate that if an investor sold the orange grove (from the Howey case) to a second bidder without knowledge of the Howey Corporation, the subsequent sale would not be considered a security.
Deaton contends that regardless of whether the $ETH ICO constituted a security sale or whether Ripple sold XRP as a security between 2013 and 2018, neither ETH nor XRP is securities. He stated that every altcoin might be deemed security when first issued, whether through an ICO or not.
Finally, Deaton advised the industry not to allow the SEC and Bitcoin supporters to take an unconstitutional shortcut by classifying tokens as securities.
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