Ripple’s XRP token is not a security and only “possibly fits the definition of an investment contract,” according to lawyer Jeremy Hogan.
The #1 reason why XRP is not a Security (a thread).
First, under the legislative definition of a security, XRP can only POSSIBLY fit under the definition of an «investment contract.» It is not a stock or bond, etc..
Even the SEC concedes this: «investment contract.» pic.twitter.com/n9g7ZEos2n
— Jeremy Hogan (@attorneyjeremy1) April 9, 2023
Hogan stated that the U.S. Securities and Exchange Commission (SEC) in its suit against Ripple “failed to legally prove the existence of an implied or explicit investment contract.”
Instead, the regulator relies on sale agreements and the Howey test.
Hogan also argues that all securities cases on which the SEC relies to determine an “investment contract” involved some form of contract between the parties. In the Ripple case, there is none.
“Indeed, how can a person reasonably rely on the offeror to obtain a profit if they have no legal remedy,”
The lawyer argues that the core question is not whether Ripple used money from selling XRP to fund its business, but whether the SEC proved the existence of a contract between token buyers and the company.
If the result seems harsh, keep in mind that the designation «security» is not meant to protect a would-be investor from making bad decisions.
The securities laws are only to require that offerors make certain disclosures regarding the contract that the purchaser is entering.
— Jeremy Hogan (@attorneyjeremy1) April 9, 2023
“Remember that the definition of a security is not designed to protect a potential investor from making bad decisions. Securities laws require only that offerors disclose certain information about the contract,” Hogan explained.
Attorney Todd Phillips said that the Howey test is “not the best way to determine an investment contract.”
He argues that for a more precise result one needs to study the contract itself, post-sale legal obligations, and the right to a share of profits. In his view, if such a framework were adopted, crypto assets would become commodities and fall under the jurisdiction of the CFTC.
The argument is: Howey isn’t the best way to decide what is an «investment contract.» You also need a contract, post-sale legal obligations, and the right to share profit.
If this becomes the test, then crypto assets are most likely commodities, giving the CFTC jurisdiction. 2/
— Todd Phillips (@tphillips) April 8, 2023
In December 2020, the SEC filed a lawsuit against Ripple, accusing it of selling unregistered securities in the form of XRP to retail investors.
A partner at the law firm Davis Polk and former SEC official Joseph Hall said the regulator had high odds of losing the case on the merits. However, he expressed doubts about a swift conclusion to the proceedings.
In late March 2023, reports emerged that Ripple had good odds of a favorable conclusion to the litigation. In light of this, XRP rose by 15%.