SEC ‘Failed To Carry Its Burden As to Each of the Three Howey Elements’ in $XRP Case, Ripple’s Lawyers Say

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Fin­tech firm Rip­ple has said that the U.S. Secu­ri­ties and Exchange Com­mis­sion (SEC) hasn’t been able to pro­vide that its sales of the $XRP token were invest­ment con­tracts dur­ing the regulator’s law­suit against it.

The SEC sued Rip­ple and two of its exec­u­tives in 2020, alleg­ing they sold unreg­is­tered secu­ri­ties when they issued $1.3 bil­lion worth of XRP tokens. Rip­ple denies XRP is a security.

Ear­li­er this year, Ripple’s CEO Brad Gar­ling­house not­ed that he believed the com­pa­ny would pre­vail in its legal bat­tle against the reg­u­la­tor. Over the past few weeks, a num­ber of influ­en­tial cryp­tocur­ren­cy firms, includ­ing Coin­base and the Blockchain Asso­ci­a­tion, filed to sup­port Ripple.

In a reply in sup­port of a motion for sum­ma­ry judg­ment, Ripple’s lawyers argued that the reg­u­la­tor has failed to show that any offer or sale of XRP was an invest­ment con­tract under fed­er­al secu­ri­ties laws. The motion reads:

“The SEC has, in any event, failed to car­ry its bur­den as to each of the three Howey ele­ments. On the first ele­ment, invest­ment of mon­ey, the SEC con­cedes that bil­lions of units of XRP dis­trib­uted by Defen­dants involved no invest­ment of mon­ey at all…

Ripple’s lawyers added that even for trans­ac­tions “that involved an exchange of mon­ey,” the SEC failed to “show that pur­chasers invest­ed that mon­ey in a com­mon enter­prise” rather than “sim­ply buy­ing an asset,” as the Howey test requires.




The Howey test refers to a U.S. Supreme Court case for deter­min­ing whether a trans­ac­tion qual­i­fies as an “invest­ment con­tract” and is, as such, con­sid­ered a secu­ri­ty. If con­sid­ered a secu­ri­ty, it would be sub­ject to dis­clo­sure and reg­is­tra­tion require­ments under the Secu­ri­ties Act of 1933 and the Secu­ri­ties Exchange act of 1934, accord­ing to Investo­pe­dia.

One of the test’s key ele­ments is deter­mine whether a trans­ac­tion relies on an expec­ta­tion of prof­it from the work of oth­ers. Ripple’s lawyers have said that the SEC failed to prove this expec­ta­tion was there when it came to XRP purchases.

As Cryp­toGlobe report­ed, cryp­tocur­ren­cy invest­ment prod­ucts offer­ing expo­sure to XRP have seen see­ing sig­nif­i­cant inflows as the SEC’s case against Rip­ple has start­ed being seen as “increas­ing­ly frag­ile” by investors.

Rip­ple set­tling the law­suit could lead to an XRP sup­ply shock, which pre­sum­ably would lead to a price surge as demand would remain the same, while sup­ply plunged. That’s accord­ing to legal expert and XRP sup­port­er Jere­my Hogan, who has been fol­low­ing the case.

Hogan has recent­ly weighed in on a rul­ing by the Unit­ed States Dis­trict Court in favor of the SEC against blockchain-based file-shar­ing net­work LBRY. The court LBRY vio­lat­ed secu­ri­ties laws by sell­ing its native LBC tokens with­out reg­is­ter­ing with the Sec. Per Hogan, the results could make their way into the SEC’s final brief in the Rip­ple case.

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Fea­tured Image via Pix­abay

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