On Sunday (April 9), Jeremy Hogan, a partner at the American law firm Hogan & Hogan, who has been closely following and commenting on the U.S. SEC’s ongoing lawsuit against Ripple, shared his reasoning for why XRP should not be considered a security.

Over a series of tweets, Hogan explained that XRP could only potentially be considered a security under the definition of an “investment contract.”

He pointed out that the SEC also uses this term in their arguments. The analysis for an “investment contract” is governed by the “Howey” case and its subsequent cases. The Howey test determines if an investment is in a joint enterprise with an expectation of profits from the efforts of others.

Hogan further argued that the SEC has yet to demonstrate that there was an implied or explicit contract of investment in the Ripple case. Instead, according to him, they have only focused on the purchase agreement. However, Hogan says a simple purchase cannot be considered an “investment contract” without any obligation for Ripple to take any action beyond transferring the asset.

He emphasized that all of the “blue sky” cases, which the Howey case relies on for defining an “investment contract,” involved some form of a contract regarding the investment. Hogan questioned how a person could “reasonably rely” on an offeror to make a profit when there is no legal recourse if the offeror fails to deliver.

Hogan concluded by stating that the issue isn’t whether Ripple used money from XRP sales to fund its business but whether the SEC can prove that there was either an implied or explicit “contract” between Ripple and XRP purchasers regarding their “investment.” According to Hogan, no such contract exists.

On April 2, John Deaton, another prominent highly-respected attorney following and commentating on SEC’s lawsuit against Ripple, shared his thoughts on why XRP and ETH should not be considered securities.

Deaton, Managing Partner of Deaton Law Firm, is the founder of CryptoLaw, a website focusing on U.S. legal and regulatory developments for digital asset holders, and the host of the YouTube channel CryptoLaw.

In a Twitter thread, Deaton explained to his 258K followers the key concepts related to securities and how they apply to digital assets.

Deaton began by addressing the often misunderstood legal term “investment contract” and the misapplication of the Howey Test on social media. He cited the Securities Act of 1933, which defines the term “security” but does not explicitly list digital assets or software code. Deaton argues that In SEC cases involving digital assets like Telegram, Kik, LBRY, and Ripple, the relevant term is “investment contract.”

Deaton says that, according to the Howey Test, a digital asset or cryptocurrency (software code), by itself, is not a security. However, he does acknowledge that it can be marketed, offered, or sold as an investment contract, which can be considered a security. Deaton highlighted that the GRAM token, XRP, and ETH are not securities, even though the ETH ICO was an unregistered securities offering, and Ripple may have offered or sold XRP as an unregistered security on specific occasions.

He emphasized that the underlying asset – digital code – is not a security, and there has never been a case in U.S. history where the secondary sale of that asset was found to be a security. Deaton used the example of the Howey Test, explaining that if an investor had sold the orange grove (from the Howey case) to a second buyer with no knowledge of the Howey Company, the subsequent sale would not be considered a security.

Deaton argues that regardless of whether the $ETH ICO was a securities offering or Ripple sold XRP as a security between 2013 and 2018, neither ETH nor XRP is a security. He pointed out that every altcoin could be considered a security when first distributed, whether through an ICO or not.

In conclusion, Deaton urged the industry not to allow the SEC and Bitcoin proponents to take an unconstitutional shortcut by labeling tokens themselves as securities.