Ripple corners SEC with motion on Howie Test

Rick Steves

“Evasive responses “must be treated as a failure to disclose, answer, or respond.”

Ripple and Chris Larsen have filed a motion to compel the SEC to answer the defendants’ interrogatories seeking “binding representations from the SEC as to how it contends Howey applies to this case, as well as identification of the factual support (if any) for those contentions”.

“This is absolutely basic information essential to the defense”, the letter continued. “Rule 33 requires the SEC to answer each interrogatory “separately and fully,” and in a manner that is as “specific as possible and not evasive” […] in order to ‘minimize uncertainty concerning the scope of [the SEC’s] claims.

“Evasive responses “must be treated as a failure to disclose, answer, or respond”, the letter added, putting further pressure on the SEC which has been quite evasive in regard to its deliberative process.

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This motion, as well as many others before, aim to further strengthen Ripple’s argument that the SEC failed to provide fair notice that XRP could be deemed a security, therefore under the scope of the regulator.

It has been increasingly debated if the Howie Test can be used to determine the nature of digital assets as the emergent asset class seems to follow different rules altogether, in the eyes of many experts.

While SEC Chair Gary Gensler reiterates that Howie works for crypto, a number of academics have said otherwise, including in Rutgers Law School and the American Enterprise Institute, suggesting a different approach to digital assets.

The SEC v. Ripple lawsuit is potentially the most critical threat to the validity of the Howie Test. The financial watchdog has recently stated so when it warned the Court that a Ripple win on the Fair Notice Defense would deem it null.

That is also why many law experts close to the legal battle over the nature of XRP have said that a Ripple win on summary judgment on that defense “could save the industry from the SEC”.

Motion shows how SEC evades Ripple’s inquiries

The motion includes several inquiries from Ripple and Chris Larsen in which the agency answers deficiently or inappropriately, according to the defendants.

One example is Chris Larsen interrogatory n.5: “State whether You contend that the XRP Ledger was not fully functional before the start of the ongoing securities offering alleged in the Complaint. If that is Your contention, Identify when You contend the XRP Ledger did become fully functional (if ever) and what actions or efforts resulted in making the XRP Ledger fully functional, and all evidence You intend to rely on to support that contention.

Instead of answering the question, the SEC stated that “Ripple engaged a team of people working on improving the XRP Ledger
throughout the period at issue in this case,” and that certain (unspecified) documents “show examples of Ripple continuing to
make efforts to develop, improve, and modify the functioning of the XRP Ledger.”

“Whether and when the XRP Ledger became ‘fully functional’ is irrelevant under Howey”, the SEC argued.

The defendants’ motion then commented: “That argument lacks any good-faith basis, because the SEC (in materials it has previously relied on to argue that Defendants had fair notice of what the law requires) has suggested that whether a “digital asset is not fully functional at the time of the offer or sale” is “especially relevant in an analysis of whether the third prong of the Howey test is satisfied”.

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