SEC v. Ripple: What Is the Definition of a Security?

DISCUSSION

II. Analysis

A. The XRP Token

The plain words of Howey make clear that “an investment contract for purposes of the Securities Act means a contract, transaction[,] or scheme.” 328 U.S. at 298–99 (emphasis added). But the subject of a contract, transaction, or scheme is not necessarily a security on its face. Under Howey, the Court analyzes the economic reality and totality of circumstances surrounding the offers and sales of the underlying asset. See Tcherepnin, 389 U.S. at 336; Glen-Arden, 493 F.2d at 1034.

Howey and its progeny have held that a variety of tangible and intangible assets can serve as the subject of an investment contract. See, e.g., Howey, 328 U.S. 293 (orange groves); Glen-Arden, 493 F.2d 1027 (whiskey casks); Edwards, 540 U.S. 389 (payphones); Hocking v. Dubois, 885 F.2d 1449 (9th Cir. 1989) (condominiums), cert. denied, 494 U.S. 1078 (1990); Cont’l Mktg. Corp. v. SEC, 387 F.2d 466 (10th Cir. 1967) (beavers); SEC v. Telegram Grp. Inc., 448 F. Supp. 3d 352 (S.D.N.Y. 2020) (digital tokens). In each of these cases, the subject of the investment contract was a standalone commodity, which was not itself inherently an investment contract. For instance, if the original citrus groves in Howey were later resold, those resales may or may not constitute investment contracts, depending on the totality of circumstances surrounding the later transaction.

Here, Defendants argue that XRP does not have the “character in commerce” of a security and is akin to other “ordinary assets” like gold, silver, and sugar. See Defs. Mem. at 3–4, 42–44 (citation omitted). This argument misses the point because ordinary assets—like gold, silver, and sugar—may be sold as investment contracts, depending on the circumstances of those sales. See Glen-Arden, 493 F.2d at 1033, 1035; Fedance v. Harris, 1 F.4th 1278, 1288–89 (11th Cir. 2021) (“Plenty of items that can be consumed or used . . . have been the subject of transactions determined to be securities because they had the attributes of an investment.” (citation omitted)). Even if XRP exhibits certain characteristics of a commodity or a currency, it may nonetheless be offered or sold as an investment contract.

As another court in this District recently held:

While helpful as a shorthand reference, the security in this case is not simply the [digital token, the] Gram, which is little more than alphanumeric cryptographic sequence . . . . This case presents a “scheme” to be evaluated under Howey that consists of the full set of contracts, expectations, and understandings centered on the sales and distribution of the Gram. Howey requires an examination of the entirety of the parties’ understandings and expectations.

Telegram, 448 F. Supp. 3d at 379. XRP, as a digital token, is not in and of itself a “contract, transaction[,] or scheme” that embodies the Howey requirements of an investment contract. Rather, the Court examines the totality of circumstances surrounding Defendants’ different transactions and schemes involving the sale and distribution of XRP. See Marine Bank v. Weaver, 455 U.S. 551, 560 n.11 (1982) (“Each transaction must be analyzed and evaluated on the basis of the content of the instruments in question, the purposes intended to be served, and the factual setting as a whole.”).