In recent months, several class action lawsuits have been filed against Ripple for selling its XRP token in an unregistered securities offering. So far, the United States Securities and Exchange Commission (SEC) has not issued any official statement on the matter, which has kept everyone uncertain.
To help end the uncertainty, Chris Giancarlo, former chairman of the Commodity Futures Trading Commission (CFTC), published an article last week arguing that Ripple’s XRP is not a security. Giancarlo is famous for helping to establish the CFTC’s position that Bitcoin (BTC) and Ether (ETH) are not securities. Therefore, it seems that he is the right person to make this case.
The only problem is that Giancarlo no longer works for the CFTC – he’s now in private practice. Not only that, but he is also currently working for a law firm that is on Ripple’s payroll. Given the clear conflict of interest here, before reading the article I was prepared to expect some bias. However, I could never have imagined how bad it would be.
I know this kills the suspense, but there’s no way to beat around the bush: The case presented in Giancarlo’s publication for Ripple’s sale of XRP not to be considered a stock offering is absurd and meaningless, so much so that I’m surprised Giancarlo was willing to put his name publicly.
I continue reading today’s article as I review Giancarlo’s analysis of whether or not the sale of XRP is an offer of securities along with an actual analysis of whether or not it is.
How to tell if an offer of tokens is an offer of securities
The Howey test is the SEC’s primary method for determining whether an investment is an offer of securities. If it is, the issuer must either register the offer with the SEC or ensure that the offer conforms to a recognized registration exemption.
As a quick update, the Howey Test comprises four items that were established in a 1946 Supreme Court case. The ruling was that there is an investment contract where there is one:
„A contract, transaction or scheme by which a person invests his money [point one] in a common enterprise [point two] and is led to expect profit [point three] only from the efforts of the promoter or a third party [point four].
For the sale of XRP to be considered an offer of securities, it must comply with each of these points. If the offer fails, even on one of these points, then it is not considered an offer of securities.
Read on to see how the XRP token compares to the Howey Test.
The first part of the Howey test is quite simple: Was there an investment of money in the transaction?
In his analysis, Giancarlo states that the XRP does not meet this aspect of the Howey Test because „the common understanding of the term ‚investment‘ is the transfer of something of value in exchange for a future return rather than a present one“.
At first glance, this sounds reasonable. However, the idea of „investment“ as an expectation of future return is driven by the „expectation of profit“ point of the Howey Test. There is no reason to confuse it here with the „investment of money“ part.
Essentially, Giancarlo is presenting a circular argument to avoid admitting the obvious: There is no way to say that there was not an investment of money here. People clearly paid money in exchange for XRP tokens. There’s no other way to look at this. I think almost every court looking at this would agree that there was an investment of money.
Remember, just because the XRP offer passes this Howey test doesn’t mean Ripple had an unregistered stock offering. The offer still has to pass all the other points of the Howey test. Therefore, Giancarlo didn’t have to go to such creative extremes to try to argue against this point. Of all the points that could be met, none is stronger than this one.
Yes, there was certainly an investment of money when people bought the XRP. Ripple owned the XRP and sold it for American dollars. End of story.