All you need to know about Ripple’s Howey Test curveball in the XRP lawsuit.

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The legal struggle between the Securities and Exchange Commission [SEC] of the United States and Ripple Labs is unlikely to finish anytime soon. The two parties have constantly filed opposing requests to dismiss the other party’s claims, as well as attempts to get “relevant facts.”

Ripple has now filed a motion to compel the SEC to answer interrogatories identifying the SEC’s theory of how the Howey Test applies to virtually all of Ripple’s transactions in XRP over the last 8 years. Even after repeated insistence by Judge Netburn, the SEC has repeatedly refused to provide relevant information on how Howey applies to Ripple’s transactions, calling it “baseless.”

In the filing, the defendants claimed,

“The SEC adheres to its position that the contentions sought are irrelevant, and refuses to provide substantive, non-evasive responses”

The Howey test is the basis on which the SEC decides whether an investment is a security. The key factors include money or assets being invested into a common enterprise or company by investors who expect a profit. Moreover, these profits have to come from the efforts of the promoter and the investors shall have no control over it.

The SEC claims that Ripple sold over $1.3 billion in unregistered securities to clueless investors through their token XRP.

Does SEC’s Howey application hold true?

The defendants now seek representations from the SEC regarding how Howey applies to this case, as well as factual backing for this argument, in the aforementioned motion. This is “absolutely basic information relevant to the defence,” according to the defendants.

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Ripple’s precise information requested via interrogatories was also stated in the petition. The first regards to information on how the purchaser of XRP had a “expectation of profits.” The statement went on to say that the SEC has continually failed to give this information, and that

“Instead, the SEC directs Defendants to unspecified “public statements” made in various forums that it contends led XRP purchasers to expect “that Ripple and its agents would undertake significant entrepreneurial and managerial efforts, with the expectation that such efforts could potentially lead to an increase in demand for XRP and therefore its price.”

Furthermore, Ripple asks the SEC to rule on whether Ether and BTC are securities and to offer a factual foundation for its decision. While the agency ruled that this information was “not relevant to the case,” the court ruled that it was relevant to Ripple’s fair motion defence.

Ripple also wants to know whether the SEC believes the firm’s actions had a significant impact on the price of XRP.

“This interrogatory is directly relevant to the application of Howey to this case, which requires proof that purchasers expected “profits to be derived solely from the efforts of [the seller]”….under Howey, the SEC bears the burden of proving that purchasers of XRP relied on Ripple’s efforts to increase the value of XRP.”

The blockchain firm also seeks to compel the SEC to identify whether XRP holders got a stake in Ripple solely due to their purchase and whether they have any right because of their purchase to receive future payments from the company.

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The filing concluded by stating,

“After years of investigation, and with discovery coming to an end, the SEC is required to provide “the best answer they can based upon current information in their possession”… it cannot evade this obligation by providing vague and ambiguous responses.”

More privilege claims

Interestingly, during a conference call discussing the long-stretched privilege dispute, Judge Sarah Netburn decided to conduct an in-camera review of SEC documents. The SEC has routinely neglected to provide internal records, including talks about the nature of XRP and ETH. This despite the fact that the judge dismissed its privilege arguments twice.

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