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:
- An investment of money
- In a common enterprise
- With the expectation of profit
- 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.