Hire A Lawyer for Gaia

Hub Proposals
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This is very much an in discussion topic.

https://twitter.com/gadikian/status/1667025168945008644

Binance

The cosmos is featured from the end of page 104 to page 107. The binance complaint seems to include numerous factual inaccuracies.

Coinbase

Pages 87-92.

Big idea

Thing is, I am not a lawyer. I am merely a former history teacher and lifelong open source enthusiast. I think that the hub needs a lawyer. I just want to open the conversation here, before kicking off a governance proposal to hire a lawyer to defend the rights of our community, or at the very least, provide advice to the community at large.

Today, in the GVA (Good Validators Alliance) @RoboMcGobo, one of the chat admins there, suggested a strategy, but I would like to allow him to further expand on that.

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I’m not a lawyer, but I struggle with this.

I worry bringing the Hub into meatspace with legal council expands the potential regulatory attack surface.

The Hub being a digitally native sovereign territory means it doesn’t have to answer to any regulatory body (especially the only regulatory body that has deemed its currency a security).

I cant see how hiring legal to defend the Cosmos tech stack (not just the Hub) doesn’t fall under the ICF mandate. The Hub itself should stay far away from this imo.

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I’ve been summoned by the Gadikian to give some input here, so I’ll just jump right into it. This stems from a tweet that I made this morning, which you can find here: https://twitter.com/RoboMcGobo/status/1668252699794522114?s=20

This idea is somewhat half-baked and I would like more input on this from an experienced attorney, but the TLDR here is that if any of the allegations in the Binance lawsuit require a threshold determination by the court that ATOM is a security, the court’s decision may have far-reaching impacts on the Cosmos Hub and, naturally, the ATOM token.

If that’s the case, the lawsuit is depriving the Hub of its day in court to contest these issues, deciding the Hub’s fate without giving the Hub the opportunity to defend itself. This potentially makes the Cosmos Hub an “indispensible party” for the purposes of jurisdiction. Failure to join an indispensible party to a lawsuit can potentially lead to a case being dismissed. Here’s the relevant FRCP section for anyone who is interested: Rule 19. Required Joinder of Parties | Federal Rules of Civil Procedure | US Law | LII / Legal Information Institute

To be clear, there are a LOT of maybes and oversimplifications in what I just wrote. As with most things in the law, nothing is a certainty. We may not even want to pursue this path because it could potentially result in the Hub or Hub affiliated entities being named or joined in the suit.

But that’s why the Hub should have a lawyer, IMO. A lawyer / law firm will be the best equipped to advise the Hub on whether to attempt to intervene and to what extent. For example, even if the Hub won’t want to directly intervene in the case, there may be numerous key motions made by either side in this case as time goes on, and it may be in the Hub’s best interest to file an amicus brief in one or more of them.

Having an attorney on standby for such an opportunity can only benefit us in ensuring that the Hub’s voice is heard in a case which could potentially decide its fate.

I think a more complicated question is how the funds would be handled and by whom (i.e., who does the lawyer actually bill for their time) and, most importantly, who counsel would be and how does that get decided.

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Basically this: https://twitter.com/zmanian/status/1668308921616936967?s=20

If the SEC is arguing that ATOM is a security because a few people’s labor in building and promoting the hub is enriching investors who have an expectation of profit, and then those exact people show up in court to intervene in the lawsuit, we’re kinda proving their point for them.

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Hey, y’all. Some of you may recognize me from being a constant Cosmos reply guy on Twitter, but as an attorney, I felt like I had to make a profile to address this issue.

My feelings on this issue are two-sided. First, McGobo’s argument regarding the SEC’s failure to join an indespensible party to a lawsuit is a legitimate one, but it needs to be remembered that, as of right now, the SEC is not asking the court to make a finding that ATOM or any other specific crypto is a security (see, PRAYER FOR RELIEF in the Binance complaint at Pg. 133).

However, an essential part of the SEC’s case against Binance is proving that Binance sold securities, so the SEC is going to have to prove that at least one of the cyrptocurrencies that they list is a security and their allegations that ATOM is a security are found in Paragraphs 429-437. Specifically, the SEC alleges in Paragraph 434 that the efforts of ICF, Jae, and Ethan are what created the expectation of profit from investors:

“The information publicly disseminated by ICF, Kwon, and Buchman has led ATOM holders, including those who purchased ATOM since April 2019, reasonably to view ATOM as an investment in and to expect to profit from ICF’s, Kwon’s, and Buchman’s efforts to grow the Cosmos protocol, which, in turn, would increase the demand for and value of ATOM.”

So the SEC has specifically identified that three parties whose efforts it believes were the drivers of value for investors. So if anyone is going to lawyer up to defend ATOM, it would need to be either ICF, Jae, or Ethan to intervene on behalf of ATOM. The complaint also identifies All in Bits, Tendermint, and Interchain Gmbh as contributors to the ongoing development of ATOM, but the SEC’s allegations are that ICF, Jae, and Ethan were the ones who made representations to investors during the ICO, therefore, they’re the ones the SEC would look to when conducting the Howey Test. As we all know by now, but for those reading who don’t, the Howey Test comes from the SEC v. W.J. Howey, Co. case from 1946 and is what the SEC uses to determine if a transaction is an “investment contract” that would be subject to the Securities Act of 1933 and the Securities and Exchange Act of 1934. The Supreme Court established four criteria to determine whether an investment contract exists. An investment contract is:

  1. An investment of money
  2. In a common enterprise
  3. With the expectation of profit
  4. To be derived from the efforts of others

So ICF, Jae, and Ethan are the “others” for the sake of the Howey test.

Summing up, I don’t think the Hub itself needs to lawyer up. If anyone would lawyer up to try and ascert this FRCP Rule 19 defense, I think ICF would be the party to do so. However, this does open ICF up to McGobo’s concern that, by appearing in the case and engaging in this motions practice, ICF would essentially be putting an automatic target on its back for the SEC to go after because ICF has now identified itself as the entity that sees itself as the most incentivized to defend ATOM’s status as a security or not.

Ultimately, I do agree that ATOM/ICF’s situation should be evaluated by a securities attorney who would be better equipped to make recommendations and advise ICF on strategies concerning the SEC’s allegations. I’m just a lowly civil defense litigator in South Carolina and I don’t practice securities law in my day-to-day at my firm, as much as I would love to be a full-time attorney in this space (my wife would probably kill me, but damn this stuff just enthralls me).

Do with all of the above as you all see fit, but I love ATOM and this community and just wanted to throw my two cents out there. Love y’all for your dedication.

DISCLAIMER: The above post does not constitute legal advice and does not create any attorney-client relationship with any party.

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This is awesome feedback and the exact sort of input I’d hoped to get when I made my tweet this morning. A quick question on this:

Summing up, I don’t think the Hub itself needs to lawyer up. If anyone would lawyer up to try and ascert this FRCP Rule 19 defense, I think ICF would be the party to do so.

My thinking on why the Hub would be the interested party in this matter is because the Hub is effectively the issuer of the asset being claimed as a security in this matter (such issuance being made programmatically by the chain’s core logic and not by the ICF, Jae, or Ethan). The Cosmos Hub in and of itself is an on-chain DAO of 100k+ ATOM holders, of which those individuals / orgs are only 3 members.

Since the whole DAO, and not just those 3 members, is implicated by this court’s decision, wouldn’t the broader DAO be the appropriate entity to intervene? Also, if the ICF for example were to intervene in the suit on behalf of the DAO, wouldn’t that involvement effectively give credence to the security argument and prove the SEC’s point?

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@jflowers515

that was pretty awesome, thank you and please do stick around <3

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My thinking on why the Hub would be the interested party in this matter is because the Hub is effectively the issuer of the asset being claimed as a security in this matter (such issuance being made programmatically by the chain’s core logic and not by the ICF, Jae, or Ethan). The Cosmos Hub in and of itself is an on-chain DAO of 100k+ ATOM holders, of which those individuals / orgs are only 3 members.

My reading of the Howey family of case law is that, because ICF was the party that was making the representations to ICO investors of the “expectation of profit,” that ICF would be the party the SEC would go after. Hub/Gaia might be the ones responsible for the ongoing issuance of the ATOM coin, but it didn’t necessarily make those representations to investors that ICF allegedly did.

So I wouldn’t want the Hub/Gaia to get involved as a DAO because they haven’t been specifically named in the SEC’s allegations. The allegations are against ICF, so ICF should be the one to come and defend itself against the SEC if it deems it necessary. The SEC has a history of wanting to go after fact patterns that are distinct and have already started and ended (like an ICO) because then you don’t have an of the subsequent confusion and complexity dealing with ownership changes, developer drama (like we’ve seen between Jae and Ethan), etc. So that’s why I would think of ICF and the DAO as two separate camps for the purposes of a Howey analysis.

Again, a competent securities attorney might see that differently than I do, but that’s how I see it at moment.

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Hey effort!

Great to see you here. My rebuttal is that sovereigns do what they’d like to, including their defense.

wdyt ser?

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I definitely share @jflowers515 's concern. I don’t think we should be too quick to jump into the fray by intervening in the SEC’s suit against Binance. I’m also not a securities litigator, but (as Jake pointed out) it’s clear that several of the SEC’s claims against Binance and Binance US (namely for failure to register as a broker-dealer/clearing house/exchange) require them to establish that at least one of the assets listed on each exchange is, in fact, a security. I fully suspect that they’ll focus on BNB, as they have separate claims against Binance as the issuer of BNB and BUSD and they devote 4-5 pages of the Memo of Law in support of their Emergency Motion for TRO to fleshing out the argument that BNB is a security. that being said, I agree that there would have to be a very good reason to risk putting a target on ATOM’s back by filing a motion to intervene.

even assuming ATOM were to successfully intervene in the case, I have doubts about whether it would have standing to file a motion to dismiss for failure to join a necessary party. I’d need to do some research here, but my gut reaction is that that if ATOM were to successfully intervene in the suit, then it would no longer have standing to move to dismiss for lack of joinder. at that point, ATOM would be in a position to defend it’s own rights, and I’m not sure whether a Court would allow it to bring a motion on behalf of( /to protect the rights of) the other assets listed in the Complaint.

I also agree with @RoboMcGobo that there’s no reason to believe that an eventual SEC action against ATOM would be confined to only the entities expressly listed in the Complaint (ICF, Jae, Ethan, Ignite, etc.). I 100% agree with Jake’s analysis that the SEC already has their sights set on ICF, Jae, and Ethan as the “issuers” of ATOM. but, I don’t think this means that an eventual SEC action won’t also implicate other participants in the network.

as you’re all likely aware, nothing coming out of the SEC right now is very clear. that being said, I think Gensler has dropped enough hints for us to assume for now that the applicability of the Howey test extends beyond just the initial offering of a PoS asset. in other words, it seems safe to assume that the Howey test extends to the present and also encompasses the expectations that current, secondary-market purchasers of ATOM (e.g., individuals purchasing ATOM on Binance) may have in relation to the efforts of the current developers, maintainers, and facilitators of the network (e.g., regular contributors to ATOM-related GitHub repositories and potentially also even the validator set and other infrastructure providers). as a result, I agree with Robert that it makes sense for the entire community/DAO to begin preparing in earnest for what may come. (affix bayonets)

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perhaps those named in the lawsuit should talk to their lawyers regarding disclosures and a path toward compliance, like DOT seems to have done. The stake holders only need a lawyer to advise them of the risk NEUTRON poses to Americans receiving what Neutron itself deems a probable security, and therefore an unregistered security.

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From a quick glance I think I might be the first lawyer to weigh in here.

I don’t have a lot of spare time/energy at the moment but figured I should add a few thoughts:

  • I tried to create a framework around how an attorney might attempt to do something like what is being suggested. Can’t post links but google “Autonomous Lawyering gabriel shapiro”.

  • LeXpunK also has some potentially related resources in its DAO Defense Protocol. Can’t post links but look on LeXpunK’s github.

  • While I am a fan of these experiments, I am also vividly aware of their downsides/limitations (especially in a litigation context), and think it’s important to note them:
    –>‘lawyering in public’ is fundamentally incompatible with the concept of attorney/client privilege/confidentiality and thus is fundamentally at odds with the philosophy of DAOs
    –>there is no clear client who the lawyer could represent in public for the benefit of the entire DAO and thus the lawyer would be limited to describing concepts/providing information but would have to avoid giving legal advice
    –>this discussion, and any discussions that the lawyer would have publicly or analyses the lawyer would publish, are in a certain sense infohazards: for the same reason that you don’t want your legal adversaries knowing what you discuss with your lawyer, you don’t really want the DAO’s adversaries to know what ‘the DAO is discussing with its lawyer’–you might even be well served by keeping the fact that you are even talking to a lawyer secret
    –>in many cases these downsides to dealing with a lawyer might more than offset potential benefits, meaning it is net more legally risky to have a lawyer

Overall, I would suggest if legal advice or representation in litigation is desired on a somewhat more predictable, accountable, transparent basis, a BORG (article recently published by Delphi Labs) should be formed and funded that is devoted to this purpose, with rules around the directors of the BORG seeking legal guidance on topics of relevance to the community and sharing legal information with the community as much as it can without compromising safety (which might be not much, in many cases)

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Working with Coin Center, Proof of Stake Alliance, or another nonprofit to file an amicus curiae brief might be useful. Solana appears to be working on filing their own amicus brief.

I’m not sure that “bringing the Hub into meatspace with legal council expands the potential regulatory attack surface” or that “ICF would essentially be putting an automatic target on its back for the SEC to go after because ICF has now identified itself as the entity that sees itself as the most incentivized to defend ATOM’s status as a security or not” or that it would “risk putting a target on ATOM’s back by filing a motion to intervene.” To wit, of the four prongs of the Howey test, not one of them hinges on whether an enterprise can hire legal representation or make legal filings. (Rather than trying to file a motion, I think an amicus brief, potentially with other identified chains, might be more appropriate.)

That said, I do agree that the SEC’s suit is largely focused on ICF/AiB as the beneficial issuers of ATOM during the ICO—they are the ones implicated in the lawsuit and do, as private entities, have to decide if they want to represent themselves. It would be nice to hear from them whether they intend to do so. (However, given that 75% of the governance power was sold, it may be more difficult for SEC to maintain that ATOM remained a security for long after that—the fourth prong of Howey, “on the effort of others,” is intended to designate a focal point of “command and control” over an enterprise; that ATOM 2.0 failed even though it was heavily supported by one of the identified entities would seem to undercut any argument that these entities command and control Hub development.

I do believe Hub needs some form of legal counsel for stakers, especially with ICS and Atom Accelerator DAO (and potential future endeavors) weakening the defense against being a security—note that Atom Accelerator now has virtually a “command and control” authority over the development of the Hub with virtually no room for other stakers to intervene.

The difficulty is hiring an attorney and interacting with them in a way that preserves privilege. I don’t have an answer to the second issue, but for the first, the major issue is that Cosmos does not have a means to speak as one. The (OG) ATOM Whitepaper says that distributed public ledgers “should have a constitution and a governance mechanism.” We only have a governance mechanism—but being able to vote on things is not the same as being constituted. In particular, a Constitution is how “the many” get constituted into a “One.” This becomes especially salient with the new possibilities afforded by DAOs and subDAOs. This part of the Cosmos vision has been woefully neglected, and it might be where we have to start to work out how we can contract with attorneys and other professionals.

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couldn’t it be argued that the governance power sold by ICF/AiB at the ICO was sold and/or transferred to a “board” of validators who then functionally maintained governance power in aggregate over ATOM, keeping it a security long after?

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I have absolutely no idea and that is why I think the hub needs a lawyer

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I am strongly opposed to the idea of the hub having a lawyer for several reasons @jflowers515 has stated. Moreover, I believe that legal counsel is unnecessary at this time.

If the hub seeks greater clarity regarding the current situation, I would suggest hiring an independent reviewer to assess the hub’s circumstances instead. However, considering the current ambiguity of the legal landscape, this may not necessarily provide assistance in the future.

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Thanks a lot for your opinion here, I think that I disagree but I’m really glad to see people participating in this conversation because I’m not certain I disagree, I feel more like this is something that we should explore thoroughly

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Couple thoughts on this. Is it clear whether the SEC is naming the Atom token on the Cosmos Hub chain as a security or the representation of that token traded on Binance software?
When Binance did proof of reserves they had almost no native atom in their wallet…though trading Atom on the exchange software is significant volume, far in excess of what they had.
I think it would be better to let Coin center or another trade/industry association be the way to fight on behalf of a protocol. Keeps from making the protocol look like a centralized entity. Maybe a community vote to support financially what Coin Center is doing as they have several suits they are considering filing against SEC.

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I think that a decentralized community can hire an attorney and it’s fine, I think that it would only threaten the decentralization of the community if that attorney was able to make decisions on behalf of the protocol but what the protocol really needs, at least I think, is just advice we need to know what’s going on

Genuinely I really don’t

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I’ll grant you that no one really knows what is going on. But the precedent of a decentralized community hiring a lawyer, especially at this stage, seems a bit hasty. I would rather see the community consider a donation to coin center and let them coordinate the efforts from several ecosystems.

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