Thread by @JohnEDeaton1

A HOWEY TEST ANALYSIS 🧵:
ONE YEAR LATER

Does #XRP pass the Howey test?

In order to pass the Howey test and be considered an investment contract (aka security), 4 factors MUST be satisfied. If ALL FOUR factors are not met, the instrument or asset is NOT a security.

On the 1 year anniversary of the @SECGov lawsuit against #XRP, I offer an answer:

#XRP does not pass or satisfy the ​Howey​ test!

Before delving into the ​Howey ​analysis, #XRP is not an investment contract because there is no “contract” underlying the “investment contract.”

There’s not a single case in 76 years since Howey​ that has found an investment contract absent a contract or privity between the buyer and seller.
The vast majority of #XRP traded has occurred in the secondary market - independent of Ripple and w/ no privity to or w/ Ripple.

Known as the Howey Test, the Supreme Court defined an “investment contract” as a “contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”

Note the word “led”

The 4 Factor Test:

1) an investment of 💰;

2) in a common enterprise;

3) with a reasonable expectation of profit; and

4) derived from the efforts of others.

For the purposes of this🧵, I only focus on Today’s #XRP.

Today’s #XRP is not 2013’s #XRP!

Its entirely possible the SEC could prove a specific transfer of #XRP between 2013-2017, within the United States, constituted the transfer or offering of an unregistered security.

As amicus counsel, my focus is on secondary market sales of #XRP made by an individual, business or an exchange.

FACTOR 1: An Investment of money. The investment of💰 factor is usually the easiest one to satisfy and many #XRPHolders’ XRP meet this prong - but not all XRP does.

Thousands of #XRPHolders acquired #XRP NOT as an investment. Some purchased the minimum amount of XRP to open a wallet in order to establish a trust line and utilize the #XRPLedger and the DEX within the #XRPL. These #XRPHolders use #XRP to acquire other tokens like #CSC or #LOX.

They utilize #XRP as a transfer and bridge asset to move #Bitcoin #ETH or other currencies or assets. The #XRP is used as a utility or exchange token and not as an investment.

Some #XRPHolders are paid in #XRP like @RuleXRP or the SBI eSports players. Payroll isn’t investing.

Some #XRPHolders acquired XRP from donations or tips or as a subscription fee for providing content. Time Magazine accepts XRP. Time didn’t make an investment when it acquired XRP. There are thousands of merchants that accept XRP as payment. Its utilized as a substitute for fiat.

Therefore, tens of thousands of #XRPHolders acquired XRP for non-investment purposes and in those instances XRP does not even satisfy Factor 1. If you don’t satisfy Factor 1, the other three Factors are irrelevant and unnecessary to analyze. It must meet all 4 Factors.

Obviously, many #XRPHolders - just like #BTC & #ETH Holders - did acquire #XRP as an investment. Thus, we will continue the analysis to determine whether their #XRP is a security.

FACTOR 2: Common enterprise.

This factor is a hotly debated factor on CT. Many argue that since the majority of first time #XRP purchasers were unaware of the company Ripple or it’s use of XRP, they could not enter into a common enterprise with a promoter they’re oblivious to.

Others, however, argue knowledge of the common enterprise or promoter is irrelevant and not required. But what does the law require?

“The existence of a common enterprise, may be
demonstrated through either horizontal commonality or vertical commonality.”

-#Telegram case.

HORIZONTAL COMMONALITY:

“Horizontal commonality is established when investors’ assets are pooled and the fortunes of each investor is tied to the fortunes of other investors as well as to the success of the overall enterprise.”

-#Telegram case

Thus, horizontal commonality requires that proceeds from sales be pooled to support the investment that will result in the distribution of profits. If Ripple held an ICO then horizontal commonality could be met, but it didn’t. It sold pre-IPO shares to venture capitalists.

The vast majority of sales of XRP are made in the secondary market unrelated to Ripple. Ripple has stated that only ONE PERCENT of XRP trading involves Ripple. Therefore, there has been no “pooling” as required by horizontal commonality b/c
Ripple doesn’t “pool” 99% of XRP sales!

Additionally, Ripple’s sales of XRP in the secondary market are made to purchasers who do not know from whom they are buying (and Ripple does not know to whom it is selling) and thus there’s no pooling of proceeds, as required by the law.

VERTICAL COMMONALITY:

“In contrast, strict vertical commonality “requires that the fortunes of investors be tied to the fortunes of the promoter.”

-#Telegram case

There is no vertical commonality here b/c the fortunes of #XRPHolders are demonstrably not intertwined with Ripple and its efforts, but instead hinge on independent market forces. How many times has Ripple announced a partnership and XRP goes down, not up? XRP moves with #Bitcoin

There is absolutely no correlation between XRP’s price and the efforts of Ripple. Plus, #XRPHolders can stake or collateralize their XRP and obtain a financial benefit whether Ripple is successful or not.

FACTOR 3:
Reasonable Expectation of Profits.

Howey’s third prong examines whether the investor entered the relevant transaction
with the expectation of profit. As stated, thousands of #XRPHolders bought XRP with the expectation to use it as currency and as a substitute for fiat. Consumptive intent means it’s not a security.

“In contrast to an investment intent, an individual may acquire an asset with “a desire to use or consume the item purchased. A transaction does not fall within the scope of the securities laws when a reasonable purchaser is motivated to purchase by a consumptive intent.”

Earlier I said note the word “led”. The relevant inquiry with the third factor is an objective one focusing on the promises and offers made to investors.
If 58% of first time purchasers of XRP were unaware of a company called Ripple and its use of XRP - they weren’t led by Ripple

4TH FACTOR:
Rely on the efforts of others (Ripple).

There’s no reasonable expectation of profits by XRP purchasers based on Ripple’s efforts. As stated, #XRPHolders can stake or collateralize their XRP regardless of Ripple’s success or failure.

TODAY’S #XRP IS NOT A SECURITY!