Deaton Says Common Enterprise Factor of Howey Will Hinder SEC Appeal Against Ripple

Attorney Deaton speculates that the common enterprise factor of Howey will be an issue for the SEC if it successfully appeals against Ripple’s victory.

In the wake of SEC faulting Judge Analisa Torres’ ruling in the Ripple case, Crypto-Law.US founder John Deaton speculated on the outcome of a possible appeal in the lawsuit. 

As reported today, the SEC urged the court presiding over the lawsuit against TerraForm Labs not to follow Judge Torres’ decision, stating that the ruling was wrongly decided. 

The SEC noted that it is considering several options to review Judge Torres’ decision, thus suggesting it may appeal the ruling. 

Deaton Reacts 

Reacting, Attorney Deaton shared an expert of Judge Torres’ ruling. In “footnote 13” of the judgment, the court held that there was a common enterprise between Ripple and XRP institutional investors. 

However, the court indicated that “it did not reach the question of whether the common enterprise extends to encompass other XRP holders, Chris Larsen and Brad Garlinghouse, the entire XRP ecosystem, and other entities.” 

According to Deaton, it is more difficult for the SEC to meet the second factor of Howey- Common Enterprise- than the third factor- “With the expectation of profit.”

READ FOOTNOTE 13 PEOPLE:

“The Court holds only that a common enterprise existed between Ripple and the Institutional Buyers. The Court does not reach the question of whether the common enterprise extends to encompass “other XP holders.” Defendants Garlinghouse and Larsen, the… https://t.co/uQO0q4M6sT pic.twitter.com/VwX4jyChSf

— John E Deaton (@JohnEDeaton1) July 22, 2023

It bears mentioning that Judge Torres ruled that Ripple’s programmatic XRP sales on exchanges do not constitute securities. Unlike institutional investors, she pointed out that retail investors did not expect to profit directly from Ripple’s efforts. 

Possible Scenario If SEC Successfully Appeals

Notably, Deaton speculated that the worst-case scenario, if the SEC successfully appeals Judge Torres’ ruling, is a remand. In this scenario, a higher court, the Second Circuit, will return the case to Judge Torres for further action. 

If the case is remanded, Deaton speculates that Judge Torres will likely rule that no common enterprise exists between Ripple and XRP holders. He recounted how the SEC “flip-flopped” its common enterprise argument during the case. 

Per Deaton, the SEC made three contradictory claims before finally arguing that XRP itself constitutes the common enterprise. 

Why SEC Lost Against Ripple

Deaton pointed out that people need to understand that the SEC lost its case against Ripple because its theory was “circular and conclusory.” 

Meanwhile, Deaton’s remarks come days after he speculated that Judge Torres will still make the same decision using the common enterprise factor of the Howey test if the Second Circuit reverses her summary judgment.