Ripple likely sold XRP in an unregistered stock offering

In recent months, a series of lawsuits have been filed against Ripple for selling its XRP token in an unregistered stock offering. So far, the US Securities and Exchange Commission hasn’t released any official statement on the matter, which has everyone guessing.

To help end the uncertainty, Chris Giancarlo, former chairman of the Commodity Futures Trading Commission, released a paper last week arguing that Ripple’s XRP is not a stock. Giancarlo is famous for helping to establish the CFTC’s position that Bitcoin (BTC) and Ether (ETH) are not stocks. So, it would appear that he is the right person to support this case.

The only problem is that Giancarlo no longer works for the CFTC – he is now in private practice. Not only that, but he also currently works for a law firm that is on Ripple’s payroll. Given the clear conflict of interest here, I prepared to expect some bias before reading the article. However, I could never have imagined how bad it would be.

I know this kills the suspense, but there is no way to mince the words here: the case made in Giancarlo’s newspaper for the sale of Ripple’s XRP for not being considered a stock offering is absurd and absurd, so much so that I it amazes that Giancarlo was willing to publicly put his name on it.

Read on in today’s article as I go through Giancarlo’s analysis of whether or not the sale of XRP is a stock offering along with a real analysis of whether or not it is.

Related: Is XRP a Security? We will never know

How to know if a token offer is a stock offer

The Howey Test is the SEC’s primary method of determining whether or not an investment is a stock offering. If so, the issuer must register the offer with the SEC or ensure that the offer falls under a recognized exemption from registration.

As a quick update, the Howey test includes four poles that were established in a 1946 Supreme Court case. The ruling was that there is an investment contract where there is:

“A contract, transaction or scheme under which a person invests their money [prong one] in a joint venture [prong two] and is led to expect profits [prong three] solely by the efforts of the promoter or third parties [prong four]. “

In order for the sale of XRP to be considered an offer of securities, it must satisfy each of these poles. If the offer also fails in one of them, it is not considered an offer of securities.

Read on to see the case of how XRP compares to the Howey test.

Money investment

The first point of Howey’s test is pretty simple: Was there an investment of money in the transaction?

In his analysis, Giancarlo states that XRP does not satisfy this pole 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, it seems reasonable. However, the idea of ​​”investment” as an expectation of future return is managed by the “expectation of profit” pole of the Howey test. There is no reason to confuse it here with the “money investment” pole.

In essence, Giancarlo presents a circular argument to avoid admitting the obvious: there is no way to say that there was no money investment here. People have clearly paid money in exchange for XRP tokens. There is no other way to see it. I think almost any court looking into this would agree that there was an investment of money.

Remember, just because the XRP offering passes this pole of the Howey test doesn’t mean Ripple had an unregistered stock offering. The bid must still pass all the other poles of the Howey test. So, Giancarlo didn’t have to do a lot of creativity to try to argue against this pole. Of all the poles that could be encountered, none are stronger than this.

Yes, there was undoubtedly an investment of money when people bought XRP. Ripple owned XRP and sold it for US dollars. End of the story.

Joint venture

The next point of the Howey test mainly refers to whether or not returns are shared by those who have invested based on the efforts of a joint venture. This pole is also likely satisfied because all XRP holders share the gains and losses when the value of their tokens rises and falls based on Ripple’s managerial efforts.

In Giancarlo’s document, he states that there is no joint venture in this case because “an XRP owner does not have the right to share Ripple’s profits and losses”.

This is a terrible subject. There are countless investments classified as stocks that do not allow you to share the company’s profits or losses. Take a bond, for example. You do not participate in the profits or losses of the company or government that issued it, however a bond is undoubtedly a guarantee.

Subsequently, Giancarlo compares Ripple to Bitcoin to support his thesis. It claims that XRP holders are no different from BTC holders, and if BTC isn’t a stock, then neither is XRP.

Unfortunately, there is a major flaw in this argument: Bitcoin development is truly decentralized, while XRP is dominated by Ripple. Hence, the owners of XRP are obviously in a joint venture, as their fate is equally shared and depends almost entirely on Ripple’s development efforts. The XRP network requires constant work, and much of the token usage depends on its future development. So to argue that there is no joint venture is clearly a denial of reality.

Giancarlo opposes this reality by stating that the XRP registry would work without Ripple’s involvement. And while it is true that if Ripple were to close today, XRP would continue to exist, it is also true that the price of XRP would collapse and the use of the platform would disintegrate.

Yes, the XRP owners have invested in a joint venture. All funds are brought together by Ripple to build the system and all users benefit or lose from the corresponding fluctuations in the token price.

Earnings expectation

In his article, Giancarlo argues that there were no profit expectations because Ripple has never officially promised any kind of profit or return to investors and instead stressed that XRP’s main purpose is liquidity.

This was a wise move for Ripple, as any marketing of potential earnings or price hikes in XRP would automatically get its SEC-reported XRP sales. But just because Ripple doesn’t promise future profits in its marketing doesn’t mean people aren’t buying XRP with the expectation of profit. Anyone who has followed cryptocurrency in recent years knows that people buy XRP with the hope that its price will rise.

XRP was one of the most successful tokens at one point. To argue that there are no profit expectations is absurd, not to mention the futile. Both Kik and Telegram tried to back up this discussion with the SEC and were shot down.

Then Giancarlo goes ahead and makes a ridiculous comparison between XRP and Bitcoin, arguing that since Bitcoin is not a stock, XRP fails to satisfy this pole.

But again, this comparison is grossly flawed. Bitcoin is not a security because it fails to meet all poles of the Howey test. So, even if people buy BTC with an expectation of profits, that’s not a guarantee because the other poles of Howey’s test aren’t satisfied.

Although Giancarlo does his best, his arguments on this point are circular and nonsensical.

Yes, users bought XRP with the hope that its price would rise.

From the efforts of others

The final point refers to whether or not profits come from the individual efforts of a person or entirely from the efforts of the third party in which they have invested. Although Giancarlo doesn’t take the time to fully explain his case on this point, he claims that he profits from holding XRP do not entirely stem from the efforts of the Ripple team.

His argument is that “the XRP architecture is completely autonomous and exists completely independent of Ripple”. In support of this, he points out that most of Ripple’s XRP is held as collateral and that the amount that is released is controlled by Ripple’s program. Controlling the token supply is only a minor way to influence the token price.

Take a look at the Ripple website and you’ll see the full team behind Ripple pushing the development of the token and its adoption with institutional investors forward.

As mentioned above, it is possible that the XRP ledger could continue to function without the Ripple team. But that would undoubtedly drastically reduce the price of the token. Therefore, it is clear that XRP’s growth and corresponding profits for token holders are heavily dependent on the efforts of the Ripple team.

Yes, XRP buyers are simply passive investors who rely on the work of Ripple’s core team to come up with new products, drive adoption, and increase the token’s value overall.

The sale of XRP is clearly a stock offering

In my opinion, XRP clearly meets all poles of the Howey test and would be considered a safety. Through his article, Giancarlo relies heavily on the assumption that Bitcoin and Ether have failed every pole of the Howey test, which is simply not true.

His whole argument was amateurish and intentionally misleading. The very distinct prongs were piled together and supported by a nonsense legalese to confuse and distract.

The views, thoughts and opinions expressed herein are solely the author’s and do not necessarily reflect or represent the views and opinions of Cointelegraph.