Why The SEC v. Ripple Decision By Judge Torres May Be Overturned

Part II - Shouldn’t we all agree on the number of Howey prongs first?

In our previous post, we focused on the asymmetric result implied by Judge Torres’ opinion. We observed, as did others like John Reed Stark and Matt Levine, that the decision by Judge Torres has the unfortunate, and rather implausible implication of the decoupling of stocks and crypto. More specifically, we pointed out that the phrase “investment contract,” which is supposed to be a catch-all term, is not doing its job if it is not able to catch stocks. We said:

However, post-Judge Torres’ decision, we find ourselves facing an interesting paradox:

What is intended to be a catch-all term couldn’t catch the most fundamental financial instrument: stocks.

This naturally raises a pertinent question:

What good is the Howey test if it doesn’t work for stocks?

If you are a subscriber, by now you know that we are not lawyers and our lens is multidisciplinary. We are not saying the legal arguments are not important, of course they are. That said, if where the legal argument takes us is so implausible, of which we truly believe that it is in this case, then the argument deserves a double-take. Is the legal argument truly rock solid? Or, is there something that we are missing?

We have come to the conclusion that it is the latter, but before we go there, we need to address one question first:

Is it possible that stocks are truly different?

Why is this an important question? It is imperative to understand that if there is some fundamental difference between stocks and crypto that could potentially warrant a different conclusion, then the said asymmetry would not be an issue. Material factual differences could lead to two different outcomes. 

Today, we will explore whether the implied asymmetry can be justified on factual grounds.