Thread by @JohnEDeaton1

THE SEC LAWYERS ARE MAKING ARGUMENTS 🆚 #XRP THAT VIOLATES BOTH THE LAW AND ITS OWN GUIDANCE - a 🧵 of proof 👇👇

THE LAW:

Howey made clear that what makes an instrument or asset an investment contract is the “scheme” behind the “offering and sale” of the asset. In Howey, the W.J. Howey Company sold tracts of land - orange 🍊 groves but the buyer also signed a service contract.

The Howey Co. would till the land, plant 🪴 the trees 🌲, water 🚿 the land, and harvest and sale the 🍊. Howey Co. would send a check to the buyers and it was a form of passive income - an emphasis was made on passive (the investors did nothing, never took possession of the 🍊

Hence, there were two separate written contracts in Howey: 1) purchase and sale land contract; and 2) the service contract. The Supreme Court held the investment contract wasn’t the land contract or service contract but the entire scheme behind the offer and sale.

The buyers were actually tourists and were hotel resort guests owned by Howey and were offered and sold these orange 🍊 groves and were promised profits by doing nothing and relying solely on the Howey Co. The totality of the circumstances is what made it an investment contract.

Howey was 1946. Now let’s fast forward to 2019 and the application of Howey to cryptocurrencies in the Telegram case.

TELEGRAM TELLS US EVERYTHING:

THE LAW:

“Cryptocurrencies (sometimes called tokens or digital assets) are a lawful means of storing or transferring value

and may fluctuate in value as any commodity would. In the abstract, an investment of money in a cryptocurrency utilized by members of a decentralized community connected via blockchain technology, which itself is administered by this community of users rather than by a common

enterprise, is not likely to be deemed a security under the familiar test laid out in S.E.C. v. W.J. Howey Co.”

- Judge Castel (Telegram-1)

Judge Castel also made clear:

“The security in this case is not simply the #Gram, which is little more than alphanumeric cryptographic sequence. Howey refers to an investment contract, i.e. a security, as ‘a contract, transaction or scheme’,”

- J. Castel (quoting Howey)

And if there was any doubt about the token itself, in Telegram-2 Judge Castel clearly states:

“the ‘security’ was neither the Gram Purchase Agreement nor the Gram but the entire scheme”

In Telegram there were purchase agreements between the investors and the company Telegram.

J. Castel basically said the oranges 🍊 in Howey weren’t securities and neither are digital tokens (whether #Grams or #XRP or whatever).

In Telegram, like Howey, there were actual purchase contacts involved and the Courts said even the contracts themselves aren’t the Securities.

NOW LET’S TURN TO THE SEC’s OWN WORDS:

“A token by-itself is NEVER an investment contract- #DOGE is simply a meme that can be transferred via blockchain operations.”

“In addition to being analytically inconsistent w/ existing law, categorizing tokens immutably as securities

will mean that tokens cannot be used for their intended purposes in the United States.”

“If tokens are delivered to the pre-functionality token purchasers after full functionality has been created, the efforts of others element would no longer be met under Howey, and any

subsequent resale of the tokens should not constitute and investment contract.”

- Perkins Coie Memo that Hinman followed.

“The token - or coin or whatever the digital information packet is called - all by itself IS NOT a security, just as the orange groves in Howey were not.”

“From the discussion in this speech, however, it is clear I believe a token once offered in a security offering can, depending on the circumstances, later be offered in a non-securities transaction.”

- Bill Hinman June 14, 2018 speech.

“I agree that the analysis of whether a digital asset is offered or sold as a security is not static and does not strictly adhere to the instrument.”

“A digital asset may be offered and sold initially as a security but that designation may change over time.”

- Jay Clayton

“One of the things I’ve been rethinking is, you know what, we tend to at the SEC to talk about the token itself as being a security - it’s not the thing itself - for ex. in Howey it was about 🍊 - it’s not that the 🍊 groves themselves or the 🍊 🌲 or the or 🍊were a security”

“What we were saying is the way that you sold those pieces of the orange groves.”

“I think its better if we rally look at the offering as a while and we don’t try to treat the tokens as securities.”

“Obviously a token in a functioning decentralized network where the token is really the coin of that network, it doesn’t make sense to treat it as a security.”

- @HesterPeirce

“The contract transaction or scheme by which the token is sold may constitute an investment contract;

but, the object of the investment contract- the token - may not bear the hallmarks of a security.”

“The analysis of whether a token is offered or sold as a security is not static and does not strictly inhere to the digital asset.”

“A token may be offered and sold initially as a security b/c it is wrapped in a transaction involving an investment contract, but that designation may change over time if the token is later offered and sold outside of an investment contract.”

-Token Safe Harbor Proposal, 2/6/20

“Nothing in the nature of a cryptocurrency, the nature of the asset itself that gives you pause? It’s the structure of the markets those assets are traded in rather than features of the asset itself, is that fair to say?”

“Well that last exactly right, that’s very fair.”

Last comment was former SEC Commissioner Robert Jackson answering a question in June 2019.

“The focus of the Howey analysis is not only on the form and terms of the instrument itself (in this case, the digital asset) but also on the circumstances surrounding the digital asset and the manner in which it is offered, sold, or resold.”

- SEC’s Framework April 3, 2019

Any asset can be packaged, offered and sold as an investment contract. #Bitcoin has been declared a commodity, but it has been packaged and offered as an investment contract before.

What the SEC is arguing related to #XRP violates the law and its own guidance and it’s shameful.