SEC Failed the ‘Howey Test’ Prosecution, says Ripple

YEREVAN (CoinChapter.com) – The Securities and Exchange Commission (SEC) vs Ripple saga continues with bother parties throwing accusations and motions at one another. In the latest development, Ripple’s lawyers asserted that the SEC failed its initial prosecution angle, which focused on the so-called “Howey Test.”

To explain the Howey test, it is best to take a step backward and see what the cornerstone of the lawsuit was.

Does the Howey Test Apply to XRP?

The SEC filed a lawsuit against Ripple in Dec 2020, accusing the company of selling unregistered securities in the form of its XRP tokens. Thus, according to the lawmakers, Ripple violated US investment laws.

What are securities, and is XRP one?

In detail, securities are “fungible and tradable financial instruments used to raise capital in public and private markets,” and their public sales fall under the jurisdiction of the SEC. Equities, such as publically traded company stocks, are good examples of securities. However, when it comes to the crypto market, the rules are vague.

Also read: Coinbase Comes Out To Defend Ripple Labs against SEC — XRP Eyes 40% Crash.

As CoinChapter reported earlier, the Ripple defense focused on the fact that a former SEC official William Hinman declared Ethereum and Bitcoin tokens were NOT securities. However, vague or not, the SEC still claims that the securities laws apply to XRP and ALL of its sales.

Ripple fired back with accusations of bias against XRP. They claimed that the SEC could not prove the difference between ETH and XRP sales.

Why is Howey test important

Fast forward to the Howey test; the prosecution also claims that the test applies to the lawsuit against Ripple.

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

Under the Howey Test, an investment contract exists if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

Also read: Ripple vs SEC Update: Ruling on summary judgment will come first, says expert

The test applies to any contract, scheme, or transaction. Thus, certain cryptocurrencies and ICOs may be found to meet the definition of an “investment contract” under the test. However, Ripple’s lawyers claim that the SEC failed this prosecution angle.

Ripple says SEC failed the Howey test prosecution angle

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…

read the Ripple motion.

Ripple’s General Counsel Stuart Alderoty joined in, accusing the SEC of inconsistency. He also called the SEC a “bouncing regulator,” implying the agency’s inability to follow through with an opinion.

Additionally, Professor J.W. Verret of George Mason University agrees that the SEC has no leg to stand on.

In Oct 2022, he predicted that if the SEC appeals to the Supreme Court, it is likely not only to lose but “set a sweeping precedent that would limit or eliminate entirely the application of Howey on cryptocurrencies, which defy the definitions of 1946.”