Is it a security: the question under everything

Graduate · enrolled learners

This lesson opens with SEC v Ripple Labs, filed December 2020.

What happened

In December 2020 the US Securities and Exchange Commission sued Ripple Labs, alleging that its XRP token was an unregistered security and that Ripple had raised funds through it unlawfully. In July 2023 Judge Analisa Torres drew a line that surprised much of the market: XRP that Ripple sold to institutional buyers under written contracts, about 729 million dollars' worth, was an investment contract and therefore a security, because those buyers reasonably expected to profit from Ripple's efforts; but the same XRP sold programmatically to the public through exchanges was not a security on those facts, because those buyers did not know whether their money was even going to Ripple and their expectation was not tied to Ripple's efforts in the same way. In 2024 the court ordered Ripple to pay a 125 million dollar civil penalty on the institutional sales. The single most consequential question in this field, whether a token is a security, did not get one answer even for one token: it got an answer that turned on how, and to whom, the token was sold.

The decision point

Whether something is a security is not decided by what it is called or what technology it runs on; it is decided by the Howey test, which asks whether there was an investment of money in a common enterprise with a reasonable expectation of profit derived from the efforts of others. Because that test reads the facts of the transaction, the same asset can be a security in one sale and not in another, which is exactly what Ripple established: one token, two answers, distinguished only by the manner of sale and the buyer's expectation. So the decision an institution faces is never the shortcut question, is this coin a security, but the real one, was this offering, to these buyers, on these terms, an investment contract, and the honest answer is often that it is unsettled and depends on facts a court has not yet ruled on. Reading the regulatory map begins with holding that question open and fact-specific, because reaching for a single blanket answer, a token simply is or is not a security, is the error Ripple proved wrong.

Recorded loss

$125,000,000

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

It is free. We do not sell the list and there is nothing to buy at the end of it.