Better Markets, a nonprofit dedicated to financial market reform, has filed an Amicus brief backing the SEC in its ongoing case against Ripple Labs. The organization argues that Ripple’s XRP tokens should be classified as securities regardless of how they are acquired.
Better Markets argues that the district court’s decision narrowed the definition of an “investment contract.” It excluded many cryptocurrency offerings from regulation. Doing so would put in harm’s way millions of retail and institutional investors in the multi-trillion-dollar but burgeoning cryptocurrency markets.
The decision also erodes protection for the less sophisticated investor who cannot discern the representations of crypto issuers. The brief criticizes the court for rejecting the idea that XRP, sold directly by Ripple or through secondary trading platforms, are investment contracts.
They said that the status of an investment contract should not be on purchases directly from the issuer. The group argues that investors expect profits to be derived from Ripple’s efforts, given its extensive marketing and promotion of the XRP token. This, according to the group, satisfies the third prong of the Howey test defining an investment contract.
Better Markets asserts that the court’s decision contradicts the broader, flexible application of the Howey test. Other courts have held that secondary-market purchases, including crypto assets, constitute securities.
Ripple XRP’s promotion creates clear profit expectations
The nonprofit argues that the district court’s narrow reading would remove investors protections at the core of U.S. securities laws. Ripple’s solicitation of retail investors with promises of future profits contingent on its efforts amounts to an offer of securities.
This makes the expectation of profit clearly dependent upon Ripple’s efforts in the transaction. Hence, XRP shall be treated as a security within the Howey test. Better Markets calls for the reversal of the decision by arguing that failure to classify secondary sales of XRP as securities will expose investors to significant harm.
The nonprofit emphasizes that the decision of the court might have wide and deep consequences for cryptocurrency and other forms of investment contracts. The protection of investors is paramount, and Better Markets believes this case represents a need for consistent, broad application of securities laws in order to stop abuses and fraud.
