security

To Be Or Not To Be . . . A Security: Takeaways From The Ripple … – Mondaq News Alerts



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The most important part of today’s ruling in the SEC v.
Ripple Labs: Ripple’s XRP token is not de
facto
a security. Let’s not take that for
granted.
It is a widely held belief that tokens issued by
companies to raise money for operations are securities. A federal
court in New York says not so fast.

According to the court:

  1. The tokens are securities if sold directly to institutional
    buyers.

  2. The tokens are not securities if sold in programmatic blind
    sales or used to compensate employees and third parties.

The apparent distinction is that the institutional buyers
reasonably expected Ripple would use the capital it received from
sales to improve the XRP ecosystem and thereby increase its price.
This meets the third prong of the Howey test (namely,
whether the economic reality surrounding the sale led buyers to
have “a reasonable expectation of profits to be derived from
the entrepreneurial or managerial efforts of others”).

The sale of tokens on a digital asset exchange programmatically
in blind bid/ask transactions are not securities because the
investor does not know whether it is purchasing the tokens from
Ripple or from some other party.

What about the use of tokens for compensation to employees and
third parties? Ripple issued those directly.

Here, the court rules that there was no investment of money,
which is required under the first prong of the Howey test
(namely, whether an “investment of money” was part of the
relevant transaction).

This is fascinating. . . and likely not the last word. Both
sides are likely to appeal the court’s ruling.

The SEC also has sued crypto-exchanges like Coinbase. Those
courts will have to decide whether secondary sales are considered
investment contracts and, likely, that would depend on the
specifics of the tokens and transactions.

At the risk of a bad pun based on today’s other big news
(i.e., the actors’ strike), stay tuned. . . the
crypto-securities market is quickly evolving.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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