[00:00:12] Speaker 02:
Good morning.

[00:00:13] Speaker 02:
May it please the court, Fred Rispoli, on behalf of Plaintiff Appellant, Hoddle Law.

[00:00:18] Speaker 02:
I'll reserve three minutes for rebuttal.

[00:00:21] Speaker 02:
In his request for declaratory relief, Hoddle Law seeks the answer to just one question.

[00:00:26] Speaker 02:
Does its use of the Ethereum network and the Ethereum DCU violate securities laws?

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Is it unlawful conduct?

[00:00:34] Speaker 02:
The SEC bitterly opposes providing just an answer to this question.

[00:00:40] Speaker 02:
And it's unclear why, because reversing the district court doesn't equate to a loss of jurisdiction by the SEC.

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It just puts its claim jurisdiction to the test under the framework of the federal judiciary.

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And the fundamental error that was committed by the district court was its standing analysis framed almost exclusively on the fact that HODL law is not being investigated or can't tell if it's being investigated by the SEC.

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that's not a requirement or the correct standard under this circuit.

[00:01:15] Speaker 02:
In the context of a standing inquiry about potential enforcement of a law or a violation of a law, it's

[00:01:22] Speaker 02:
This is from LSO, a realistic danger of sustaining a direct injury, not just from enforcement of the statute, but from the statute's operation.

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And so what that means is if tomorrow the SEC by Fiat announces that it views the Ethereum network and the Ether DCU

[00:01:41] Speaker 02:
as securities.

[00:01:42] Speaker 02:
Hoddle law has de facto engaged in federal securities violations and that can trigger a host of things reporting to the self law.

[00:01:50] Speaker 01:
Why don't you just wait until they do that and then you can file your lawsuit.

[00:01:55] Speaker 02:
Well that's the problem your honor is that there's

[00:02:00] Speaker 02:
The problem is that, yes, on the one hand, we can wait 10 years for the SEC to make a decision, because it hasn't yet since the initiation of the lawsuit.

[00:02:09] Speaker 02:
But it's not required for a plaintiff to sit back and wait in order for something, in order for the government to take that position.

[00:02:20] Speaker 01:
Under the Declaratory Judgment Act, you first have to satisfy that there is a true case or controversy.

[00:02:27] Speaker 01:
Yes, Your Honor, exactly.

[00:02:29] Speaker 02:
and i just they've not taken any action against you correct yet there's no action taken against the law firm your honor but again that's not the the issue that they sent you a letter that

[00:02:41] Speaker 02:
possibly might be under... Well, Your Honor, they have sent no letter, but they also won't reveal if they are investigating the firm or not.

[00:02:49] Speaker 00:
Do you have any basis for saying that there's a threat of investigation, or are you arguing that you think they may actually be investigating you?

[00:03:00] Speaker 02:
Yes, Your Honor, there's a threat of investigation, but more as a... One, we don't know the specifics, because the SEC won't divulge that under its deliberations process privilege.

[00:03:10] Speaker 02:
The threat is the more general usage of the crypto participants in general because the issue is, and this is happening so fast, if you look at what this court has said and where the constitutional rightness issue overlaps with the standing issue is

[00:03:29] Speaker 02:
It's not, and again, this is in the LSO case, citing Brennan, it's not consummation of the threatened injury that's required.

[00:03:38] Speaker 02:
It's not a discernible test.

[00:03:40] Speaker 02:
It's one of degree.

[00:03:41] Speaker 02:
And you look at a couple of factors.

[00:03:44] Speaker 02:
One of those is past enforcement actions.

[00:03:46] Speaker 02:
The SEC has brought cases against hundreds of individuals, companies, individuals.

[00:03:53] Speaker 02:
and not just exchange defendants, but— Against Ethereum users?

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As of June 28, 2024, and I'd be happy to provide that case to Your Honor, the SEC just issuing an enforcement action of the creator of the Ethereum network in the Eastern District of New York.

[00:04:11] Speaker 02:
Now, the problem in these crypto cases is that

[00:04:16] Speaker 02:
The creator of the Ethereum network uses it in some but different ways than how the law would use it.

[00:04:21] Speaker 02:
There's all sorts of ways you can use these tokens on the network.

[00:04:25] Speaker 02:
And so that's why it's not sufficient to just let another case with a different, in this case, defendant.

[00:04:30] Speaker 00:
Do they take a position as to whether Ether or Ethereum is a security in that action in New York?

[00:04:43] Speaker 02:
In that action in New York, it is ambiguous because the court or the SEC is alleging indirectly, yes, because the way that the claims are structured currently is that certain other DCUs that are alleged to be securities violations have to use the Ethereum network in order to function.

[00:05:04] Speaker 02:
And every time you use another DCU on the Ethereum network, you use the underlying token Ether

[00:05:10] Speaker 02:
in order to exchange those tokens or move those tokens around.

[00:05:14] Speaker 02:
And the SEC has been extremely coy in being able to bring these cases to fruition from the context of its allegations.

[00:05:23] Speaker 02:
So it's very unclear exactly where that is going to go.

[00:05:26] Speaker 04:
But again.

[00:05:27] Speaker 04:
You haven't had a letter.

[00:05:28] Speaker 04:
No, the SEC hasn't said that they're going to investigate.

[00:05:33] Speaker 04:
And there hasn't actually been an Ethereum user being charged by the SEC.

[00:05:41] Speaker 04:
It's kind of hard to see how you're out of the bailiwick of a general threat of prosecution into something more realistic.

[00:05:50] Speaker 02:
Well, I would say that the court needs to take this approach in the overall framework that we have a fundamentally new technology that is disputed by many government agencies as to what this is.

[00:06:07] Speaker 02:
For example, we've got the CFTC.

[00:06:09] Speaker 02:
claiming that the Ethereum network and the token are commodities.

[00:06:13] Speaker 04:
Doesn't that counsel against granting declaratory relief if there's a open debate among different federal agencies about how to categorize and regulate this new existence?

[00:06:27] Speaker 04:
I mean, that's the reason why it doesn't make sense in some ways to force the SEC to speak before it's finished its consultation process with other agencies, no?

[00:06:39] Speaker 02:
To some extent, Your Honor, but overwhelmingly, the answer to that is no.

[00:06:45] Speaker 02:
And that's for a couple different reasons.

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One is because we are not talking about an SEC that just started looking at this issue.

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The SEC has been looking at the Ethereum network for 10 years.

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And the case law is clear that when an agency is delaying in bad faith,

[00:07:04] Speaker 02:
then the courts can step in and take action when it sees that an agency is specifically trying to say that it's trying to engage in tactics to make its decisions unreviewable.

[00:07:16] Speaker 02:
Six years has been held to be unreasonable in past cases.

[00:07:20] Speaker 04:
But that's when a prosecution has been initiated, right?

[00:07:27] Speaker 04:
What you're describing about delays is after an agency has initiated a prosecution, which is not where we are.

[00:07:35] Speaker 04:
I mean, I understand the frustration that you are expressing, and obviously so since there have been multiple petitions.

[00:07:44] Speaker 04:
It's just whether it enters into the realm of a live case or controversy is what we're trying to wrestle with.

[00:07:51] Speaker 02:
Exactly, Your Honor.

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And I would just fall back on the fact that the SEC's failure to act and

[00:07:59] Speaker 02:
the issue of whether it's investigating or going to investigate how to law is simply not a requirement under this circuit standing analysis and I guess I would tie that into the overlapping APA final agency action issues which is that in any event how to law can now sue the SEC because in the intervening time

[00:08:19] Speaker 02:
between what happened at the district court level and Palin's opening brief, the SEC did take final agency action.

[00:08:27] Speaker 02:
This is in our reply, but the SEC affirmed to the Third Circuit that rulemaking on digital assets was, quote, unwarranted because the present state of the law, the 1933 Securities Act, encapsulates this emergent technology.

[00:08:41] Speaker 02:
That petition

[00:08:43] Speaker 02:
by a US exchange specifically asked the SEC to engage in a new regulatory framework and to address the, quote, classification of crypto assets as securities.

[00:08:54] Speaker 02:
In other words, how can the market know what they're doing is legal or illegal?

[00:09:00] Speaker 02:
And so obviously, even in that broad framework, Ethereum would fall under

[00:09:04] Speaker 02:
the general classification of crypto assets.

[00:09:07] Speaker 04:
Is there a case that says that the decision to not engage in rulemaking is itself a final decision under the APA?

[00:09:18] Speaker 02:
Only to the extent, Your Honor, that there are those cases that say the agency's bad faith or impropriety or unwillingness to make a decision is demonstrative that it's not necessarily a final decision, but demonstrative that it will never make a final decision.

[00:09:35] Speaker 02:
And I guess I would turn back to the rulemaking petition itself, which was, again, we're talking about the consummation of agency action.

[00:09:44] Speaker 02:
The petition itself was done by a court order, a review of staff at two levels, high levels of the SEC, recommendation by the staff, the commission deliberating, and the commission making the determination after, quote, careful consideration.

[00:10:03] Speaker 02:
this final agency action, which is that we're never going to take a final agency action because we don't have to.

[00:10:09] Speaker 00:
So you don't believe that Hinman's speech was a final agency action?

[00:10:14] Speaker 02:
I was just about to move to that, Your Honor.

[00:10:15] Speaker 02:
Even if you don't want to address that petition issue in the Third Circuit, the district court erred in saying that the Hinman speech was not a final agency action because that

[00:10:26] Speaker 02:
specifically squarely addressed Ethereum, the network, and that the Ether securities are not transactions.

[00:10:33] Speaker 00:
Why can't you rely on that statement?

[00:10:36] Speaker 00:
And then if the SEC were to try to prosecute you, just say, well, we relied on this statement by the SEC.

[00:10:46] Speaker 02:
we took you at your word because the SEC has already made that argument to another district court in New York saying this speech has nothing to do with the SEC and this was just somebody that yes was the director of the division of corporate finance but really given his personal opinion and what happened there is that there was then a bitter fight over internal emails and discussions with the SEC about that speech and we've since found out that the SEC

[00:11:13] Speaker 02:
circulated that speech, analyzed it and modified it dozens of times through 18 offices and divisions whereby the then chair of the SEC publicly affirmed in congressional testimony this speech, this is the way our staff will evaluate whether a digital asset is a security.

[00:11:33] Speaker 02:
Even the general counsel of the SEC in some of those emails said

[00:11:39] Speaker 02:
the legal effect of this speech is going to make it hard for the agency to take a different position on ether in the future so that's the problem that we're in is that the SEC says one thing and then it'll say another thing to court and it'll say a different thing in a different action and then another uh... different claim that it'll make and there is zero certainty that HODL law can rely on to engage in i guess i would uh... go to

[00:12:06] Speaker 02:
Other cases where exchanges and individuals, they've all argued lack of fair notice, lack of fair notice in all of their cases.

[00:12:16] Speaker 02:
We didn't have fair notice that what we were doing was illegal.

[00:12:20] Speaker 02:
And courts have repeatedly struck down that defense of fair notice saying,

[00:12:26] Speaker 02:
based on everything the SEC's done in operating, you did have fair notice.

[00:12:31] Speaker 02:
And so the case will go forward.

[00:12:33] Speaker 02:
And so it's just not a, that will not be a justification for HODL law in any future issue where you have, where you have, you know, the question of, well, you know, we asked, they didn't say anything.

[00:12:45] Speaker 02:
You know, there's just simply no fair notice there.

[00:12:48] Speaker 02:
And, you know, again, I asked for an opinion letter from the SEC.

[00:12:52] Speaker 02:
Not a specific opinion letter, Your Honor, but I would state that the record is clear that the SEC has zero, zero cases of an individual or entity ever requesting a determination that a particular DCU is not a security.

[00:13:09] Speaker 02:
The SEC has never done that once, and so it's not required under the standing and rightness rules to engage in an act of futility

[00:13:19] Speaker 02:
uh... there's never been a requirement to engage in such an activity.

[00:13:23] Speaker 00:
Well, I'm just, you know, I represented corporations a long time ago when I was a litigator and we, on behalf of our clients, we often write opinion letters and get answers back on specific facts and you just didn't have a, I know it's not a requirement but your argument is that you're operating in a world of uncertainty

[00:13:49] Speaker 00:
So see if they won't give you an opinion letter.

[00:13:52] Speaker 02:
Well, Your Honor, the SEC has not given one opinion letter ever in its history of evaluating digital assets where it says, here's the token.

[00:14:03] Speaker 02:
We don't think this is a security.

[00:14:05] Speaker 02:
And obviously, some of these are done in private and in confidence.

[00:14:09] Speaker 02:
So I don't know if publicly or if privately one of these has ever happened.

[00:14:13] Speaker 02:
But I can't think of any instance where the SEC has ever done this, and especially

[00:14:19] Speaker 02:
In light of its, what I would say, final agency actions, either from the speech or from the petition in December itself, we just don't have the requirement for that to happen.

[00:14:32] Speaker 02:
And even, you know, I'll just end on the bare minimum of economic injury, even under this circuit, that if there's economic injury to a plaintiff, even future economic injury, that can be sufficient to converse stand-in at times as well.

[00:14:48] Speaker 02:
That's not even requiring the plaintiff to engage in that activity.

[00:14:53] Speaker 00:
Obviously, you'd prefer if the GCEs were not considered securities, right?

[00:14:58] Speaker 02:
Correct, Your Honor.

[00:14:59] Speaker 02:
It's our position, their commodities.

[00:15:01] Speaker 02:
I see I'm running out of time.

[00:15:03] Speaker 00:
Thank you.

[00:15:28] Speaker 03:
Please the court, David Lasitsa for the United States Securities and Exchange Commission.

[00:15:44] Speaker 03:
The SEC is permitted to act through rulemaking or case-by-case enforcement actions.

[00:15:49] Speaker 03:
Those are two avenues to choose, and under the Supreme Court's decision in SEC versus Chenery, either avenue is permissible.

[00:15:57] Speaker 03:
But it's indisputable that neither has happened here.

[00:16:00] Speaker 03:
That's why HODL law lacks standing.

[00:16:02] Speaker 03:
HODL's claim is not justiciable.

[00:16:03] Speaker 03:
A case of controversy could develop for HODL law, but it hasn't.

[00:16:07] Speaker 03:
They could request the rulemaking.

[00:16:09] Speaker 03:
The SEC could act on that petition.

[00:16:10] Speaker 03:
there will be rulemaking or denial of that petition as they point to a different party who did hold a law could then challenge that determination in court as that other party has.

[00:16:21] Speaker 03:
Or if the SEC brings an enforcement action against HODL law in district court, HODL law can, in that court, make its arguments about commodities, notice, et cetera.

[00:16:31] Speaker 03:
Under either path, though, a commission rule or enforcement action, HODL law would get review.

[00:16:36] Speaker 03:
But as the district court found here, neither has happened.

[00:16:39] Speaker 03:
So there's no case or controversy between the SEC and HODL law.

[00:16:43] Speaker 03:
What HODL law can't do is try to leapfrog over this requirement to get an opinion that at this point would be purely advisory.

[00:16:51] Speaker 03:
So I'd be happy to take your questions.

[00:16:52] Speaker 03:
But there were some topics that came up that I think we could shed light on, if that would be helpful.

[00:16:57] Speaker 03:
Or I was going to talk about the case that was recently filed and maybe some.

[00:17:01] Speaker 00:
Why don't we talk about that case?

[00:17:03] Speaker 03:
Sure, yeah.

[00:17:05] Speaker 00:
So first, can you give us a site to it or something?

[00:17:07] Speaker 03:
Yes, absolutely.

[00:17:09] Speaker 03:
So it's SEC versus Consensus Software.

[00:17:12] Speaker 03:
It's number 24CV4578 in the Eastern District of New York.

[00:17:22] Speaker 03:
The commission brought enforcement action against consensus, alleging that it failed to register the offer and sale of certain crypto assets, failed to register as a broker.

[00:17:30] Speaker 03:
However, crypto asset security is not ETH itself.

[00:17:34] Speaker 03:
It's a crypto asset staking programs.

[00:17:36] Speaker 03:
Staking in this context is about pooling ETH, contributed by investors and providing them a pro-radic interest in that pool as rewards, often by issuing the reward itself or a new crypto asset.

[00:17:48] Speaker 03:
Now this would be the same situation as if someone pooled silver bars

[00:17:52] Speaker 03:
or gold bars or whiskey receipts.

[00:17:55] Speaker 03:
Anytime there's a pooling of investment under Howie, an investment of money, pooling of investments so that there's a commonality between investors, and they expect profits from that pooling, how the pool is managed.

[00:18:07] Speaker 03:
It doesn't in that situation matter what the underlying is, and in fact,

[00:18:12] Speaker 03:
On June 18th, 2024, Consensus Software announced and published a letter announcing that the SEC's Enforcement Division notified them that it's closing its investigation into what's called Ethereum 2.0, which is sort of a common term now being used for the current Ethereum standalone by itself.

[00:18:32] Speaker 03:
So that case is a very different case than Ethereum itself.

[00:18:36] Speaker 00:
That's right.

[00:18:37] Speaker 00:
Is that?

[00:18:38] Speaker 03:
Hm?

[00:18:38] Speaker 00:
Do you have a site for that case?

[00:18:40] Speaker 03:
That was the consensus case.

[00:18:42] Speaker 03:
There was a letter released by consensus.

[00:18:45] Speaker 03:
The SEC did not release it itself.

[00:18:48] Speaker 03:
It was made public through a blog post.

[00:18:52] Speaker 03:
We could provide a letter, and we could attach that letter to the court.

[00:18:54] Speaker 00:
So are you saying, depending how the Ethereum is used, it could amount to a security that's regulated, or it may not

[00:19:06] Speaker 00:
amount to the security that's regulated, so you have to look at each individual type of transaction?

[00:19:12] Speaker 03:
I mean, that's absolutely right.

[00:19:14] Speaker 03:
There are many different ways of having an offering even for the same kind of object or asset.

[00:19:22] Speaker 03:
You can't say it's always or never security in some circumstances because it depends on

[00:19:28] Speaker 03:
Uh, how it's configured, how it's packaged, how it's offered, what statements are made.

[00:19:33] Speaker 03:
And, you know, that is true again of, you know, real estate, some real estate investments or some investments in commodities like silver bars, depending on if there was pooling or not.

[00:19:42] Speaker 03:
Sometimes it is a securities offering and sometimes it's not as highly dependent as your honor points out on the facts.

[00:19:48] Speaker 03:
and circumstances of each case, it's particularly true for crypto assets.

[00:19:51] Speaker 00:
Would the SEC be able to issue an opinion on the particular use by Hile law of the Ether, on the Ethereum, whatever it is, site or web or coin base?

[00:20:10] Speaker 03:
Well, so I would just

[00:20:13] Speaker 03:
The there is a process that your honor was familiar with talking about in private practice.

[00:20:18] Speaker 03:
There's something called a no action process.

[00:20:20] Speaker 03:
No action relief has been granted to three crypto asset issuers.

[00:20:25] Speaker 03:
It's in view pocket full of quarters and Kern key jet.

[00:20:29] Speaker 03:
Now there are limits to that.

[00:20:31] Speaker 03:
It's not action by the commission.

[00:20:33] Speaker 03:
It is a letter from enforcement staff often saying

[00:20:37] Speaker 03:
uh... under the circumstances presented by council and under particular facts that we will not recommend to the commission under the understanding of those facts at this time what will not recommend enforcement action but it's not immunity from suit it's the comfort that it gives and there are you know cases about that so that is a process available it happened three times in the crypto asset space there are also five offerings that have been registered or qualified on the securities act where issuers came forward and said

[00:21:06] Speaker 03:
we want to register these securities and then that they were registered or qualified.

[00:21:13] Speaker 03:
So there are means available even in the crypto assets base.

[00:21:17] Speaker 00:
So it could be that, am I right in looking at it this way, that Ether could, or the DCUs could be a commodity, but if used in a particular way, could come under regulation by the SEC or enforcement.

[00:21:34] Speaker 03:
Well, let me try to just, I mean, I think that's an essentially correct outline, but let me, if I could explain the CFTC, SEC commodity issue, because it's, you almost need a flow chart, and the CFTC produced one that's useful.

[00:21:48] Speaker 03:
But securities, you know, are commodities.

[00:21:52] Speaker 03:
Commodity is a broad definition.

[00:21:54] Speaker 03:
It includes everything except onions and movie ticket receipts, for historical reasons.

[00:21:58] Speaker 03:
But securities are carved out.

[00:22:01] Speaker 03:
Yes, it's a fascinating definition.

[00:22:03] Speaker 03:
The onion is actually more interesting than movie ticket receipts, which turns out to be, I think, just lobbying.

[00:22:10] Speaker 03:
But securities are carved out of the CFTC's jurisdiction, except in very rare limited circumstances.

[00:22:17] Speaker 03:
So the CFTC can identify a commodity, but that doesn't mean it's identifying an asset that's a commodity.

[00:22:22] Speaker 03:
and not a security.

[00:22:24] Speaker 03:
And the crypto assets can be subject to multiple regulatory frameworks.

[00:22:27] Speaker 03:
But as Your Honor pointed out, if there were a suit filed and a conflict between the agencies about how to view it, that gets litigated.

[00:22:35] Speaker 03:
There was a recent case, CFTC versus Archegos, in the Southern District of New York, where the CFTC asserted that some complex

[00:22:44] Speaker 03:
instrument was a commodity, and the SEC came in and said, actually, you know, we could view it as a security, and the court dismissed the CFTC's complaint.

[00:22:54] Speaker 03:
Now, could it work the other way?

[00:22:56] Speaker 03:
You know, CFTC has asserted its authority.

[00:22:59] Speaker 03:
There's a case called Hunter versus FERC, where the Energy Commission thought something was not a commodity, and under CFTC's jurisdiction, again, they're about futures and derivatives on commodities, more than commodities itself.

[00:23:11] Speaker 03:
But sort of the commodity versus security question does get litigated and can be sorted out.

[00:23:17] Speaker 03:
But even in Howie, you can offer a commodity like an orange as part of investment contracts.

[00:23:22] Speaker 03:
So it really is very factual.

[00:23:25] Speaker 03:
And we don't know, if you read the complaint, exactly what transactions Holder Law is engaged in.

[00:23:30] Speaker 03:
We think it's sort of intentionally vague, but we did not try to say anything one way or the other about that, because there are activities that could look more like brokering activities, even for a law firm.

[00:23:42] Speaker 03:
Or they could be just regular resellers.

[00:23:44] Speaker 03:
And regular resellers in a retail market

[00:23:46] Speaker 03:
As we point out in footnote four of our brief, they have a statutory exemption.

[00:23:51] Speaker 03:
They're not an issuer, underwriter, or dealer.

[00:23:53] Speaker 03:
This is sort of very well known.

[00:23:55] Speaker 03:
So if they just said, we're just transacting, any lawyer would tell them, oh, you're in retail.

[00:24:00] Speaker 03:
You're not affiliated with the issuer.

[00:24:01] Speaker 03:
You're not part of the initial distribution of the tokens.

[00:24:05] Speaker 03:
You know, that's the kind of, you know, comfort that is given, and it's been the clear, consistent position of the SEC in enforcement cases that they're not going after resellers.

[00:24:13] Speaker 03:
The people the SEC are going after are issuers, affiliates, people who are acting as brokers, dealers, and exchanges.

[00:24:21] Speaker 03:
You know, they pointed out to one case and said, no, those are individuals.

[00:24:24] Speaker 03:
No, they were affiliates of the issuer.

[00:24:25] Speaker 03:
In Ripple, it's, you know, the CEO.

[00:24:28] Speaker 01:
Has the SEC ever issued any kind of public statements to that effect?

[00:24:32] Speaker 03:
So, you know, I asked directly about this reseller issue, and I think that outside of the releases about Rule 144, which is a rule about who is an underwriter,

[00:24:45] Speaker 03:
I think this is just so well known, and I think there have been certain statements in litigation, but the commission itself, I think you just have like rule 144, which cautions, if you read it, it says like, even if you're an individual, you could have a problem if you're affiliated with the issuer.

[00:25:01] Speaker 03:
So there are very hard questions, but I think you would just look to that rule and the statute itself gives the guidance.

[00:25:07] Speaker 04:
Is there ever something about the DCU that makes it more likely to seem like a security than a commodity?

[00:25:14] Speaker 04:
In other words, ether one place, a different DCU in another place?

[00:25:20] Speaker 04:
As opposed to the form of issuance or other things.

[00:25:22] Speaker 03:
I don't know that there's anything that makes it, there's a unique asset structure that makes it more or less like a security.

[00:25:28] Speaker 03:
I think the problem is you have 25,000 at least as one court recognized of these tokens.

[00:25:34] Speaker 03:
It seemed to be some part of it.

[00:25:37] Speaker 03:
We're trying to avoid blowing a hole in the registration requirements.

[00:25:39] Speaker 03:
They're getting money in general from a lot of these tokens from people investing it.

[00:25:44] Speaker 03:
People are losing money.

[00:25:45] Speaker 03:
They're relying on other people.

[00:25:47] Speaker 03:
And, you know, it seems like it's a challenge for the disclosure regime.

[00:25:51] Speaker 03:
But I don't think it's any different than other asset classes.

[00:25:53] Speaker 03:
So, for instance, in school or this courts in school or you've got a general partnership agreements, generally not a security.

[00:26:01] Speaker 03:
But if you have powerless partners and they look more like limited partners based on the facts and circumstances highly.

[00:26:08] Speaker 03:
highly calibrated, fine distinctions.

[00:26:11] Speaker 03:
Suddenly, a general partnership agreement actually looks more like a limited partnership agreement where people needed disclosure under the securities laws.

[00:26:18] Speaker 03:
They needed prospectus.

[00:26:20] Speaker 03:
And in school or the court says, you know, when we make these determinations, this looks more like a security.

[00:26:25] Speaker 03:
It needed to be registered.

[00:26:26] Speaker 03:
What's that asset class looks like?

[00:26:29] Speaker 03:
More than $25,000.

[00:26:31] Speaker 03:
But you don't see the SEC trying to say, well, this individual general partnership agreement is fine.

[00:26:36] Speaker 03:
This one is not.

[00:26:37] Speaker 03:
It's sort of not how the agency works.

[00:26:39] Speaker 03:
As the district court found, there's no obligation to give that kind of private party's request for guidance.

[00:26:45] Speaker 03:
And that's just not how the agency works.

[00:26:48] Speaker 03:
Other agencies work differently.

[00:26:49] Speaker 00:
What do we make of this Hinman speech?

[00:26:53] Speaker 03:
So I think, you know, it's as

[00:26:56] Speaker 03:
As counsel pointed out, or as the commission also, it's Mr. Hinman himself.

[00:27:00] Speaker 03:
It's not action by the commission.

[00:27:02] Speaker 03:
The speech expressly disclaims that it's commission action.

[00:27:05] Speaker 03:
And twice, first of all, there's a standard footnote.

[00:27:08] Speaker 03:
It is a script.

[00:27:09] Speaker 03:
It says, this speech expresses the author's views, does not necessarily reflect those of the commission.

[00:27:15] Speaker 03:
But even in the text of the speech itself, it says, Mr. Hinman says, based on my understanding of the present state of ether, again, 2018,

[00:27:23] Speaker 03:
present state of the Ether and the network offers and sales of Ether non-security transactions.

[00:27:29] Speaker 03:
So, you know, it's not a product of a evaluative process by the Commission itself.

[00:27:36] Speaker 03:
The Commission can only act by majority of its commissioners in a vote that's by statute.

[00:27:41] Speaker 03:
And there's no vote to delegate that power to individual division heads.

[00:27:48] Speaker 03:
And we have a lot of division heads.

[00:27:50] Speaker 03:
And I have a lot of bosses.

[00:27:51] Speaker 03:
And I think it would just be very difficult and practical if any single commissioner or director of division could bind the agency, that would be a problem for us.

[00:27:59] Speaker 03:
It would also be a problem for courts, because how would you determine and review agency policy if anyone can make that policy?

[00:28:06] Speaker 03:
So this statutory requirement of acting through the majority of the Commission sort of is what gives agency action, final agency action, that's then very reviewable, but the Hinman speech is just not.

[00:28:20] Speaker 04:
What about the fair notice issue that Council raised, that if there's this

[00:28:26] Speaker 04:
indefinite quality to, is Ethereum a security or not?

[00:28:31] Speaker 04:
And people are lingering under this apprehension of what might happen.

[00:28:35] Speaker 04:
Why isn't there some due process concern potentially with the SEC springing into action and bringing in action against someone?

[00:28:43] Speaker 03:
So, you know, we talked about how the district court said there's no statutory obligation to give that guidance.

[00:28:48] Speaker 03:
But in any event, there is sufficient guidance.

[00:28:51] Speaker 03:
I think it's notable.

[00:28:51] Speaker 03:
I mean, my counsel said every court that looked at this question when it was actually litigated turned down the fair notice argument.

[00:28:58] Speaker 03:
I mean, that's pretty remarkable.

[00:29:00] Speaker 03:
And again, that's very factual.

[00:29:01] Speaker 03:
What did they know?

[00:29:02] Speaker 03:
uh, in that position.

[00:29:03] Speaker 03:
And if you look at the cases, uh, like, uh, people are consulting attorneys and they know what the test is, even if they don't know how it will come out, they're getting opinion letters, council letters, there's a scorecard system.

[00:29:16] Speaker 03:
And the court said, you know, you were sort of aware for it.

[00:29:18] Speaker 03:
Law firms give advice about crypto day in and day out.

[00:29:21] Speaker 03:
And that's sufficient, especially in this commercial context where industry participants can plan their behavior carefully.

[00:29:27] Speaker 03:
And I also just have to disagree that there's no sources of guidance.

[00:29:31] Speaker 03:
The commission itself issued the Dow report seven years ago in 2017.

[00:29:36] Speaker 03:
And it said, we're putting people on alert.

[00:29:39] Speaker 03:
You might be offering securities.

[00:29:40] Speaker 03:
We notice a very big thing is happening in this industry.

[00:29:43] Speaker 03:
And then there are subsequent enforcement actions, 90.

[00:29:46] Speaker 03:
But after the Dow report, courts look at the Dow report when analyzing notice.

[00:29:50] Speaker 03:
Three cases I'll highlight, Coinbase, Terraform, and Ripple.

[00:29:54] Speaker 03:
And they said, look, that was providing notice that if you operate in this space, you might be offering a security.

[00:30:00] Speaker 03:
And in addition to those crypto cases, how it was decided in 1946, since then it's been through a lot of technological changes.

[00:30:07] Speaker 03:
We have cases involving pay phones, cell phones, airplanes, the internet, aerospace, satellites.

[00:30:12] Speaker 03:
And it's a case by case determination.

[00:30:15] Speaker 03:
you know, for how you look at past cases involving Howie, and the courts say that can give notice.

[00:30:22] Speaker 03:
We also have the Dow report.

[00:30:23] Speaker 03:
Cases say that that gave specific notice.

[00:30:26] Speaker 03:
So, you know, it's impr- again, and just turning back, it's impractical and improper for the Commission to offer asset by asset determinations, which is sort of what kind of the notice that we're being asked for.

[00:30:36] Speaker 03:
Again, 25,000.

[00:30:38] Speaker 03:
And if we- it's very hard to give up down without

[00:30:42] Speaker 03:
you know, some mechanism, but there is that, you know, no action process with its, you know, limits to get there.

[00:30:51] Speaker 03:
If you have no further questions.

[00:30:53] Speaker 00:
Thank you, Council.

[00:30:54] Speaker 00:
Thank you.

[00:30:55] Speaker 00:
I think you had some time left, Mr. and Mrs. Foley.

[00:31:09] Speaker 02:
Thank you.

[00:31:10] Speaker 02:
I'll have you address any issues the court has, but I think in my rebuttal time I want to stress what was just discussed, and Judge Wardlow hit it on the head.

[00:31:19] Speaker 02:
It's depending on how Ethereum is used.

[00:31:21] Speaker 02:
The SEC says it could be used in a lot of different ways, so we don't know.

[00:31:25] Speaker 02:
what's going to happen with this consensus case, and it doesn't impact how hot a wall.

[00:31:29] Speaker 02:
Do you work with issuers?

[00:31:30] Speaker 02:
No, not at all, Your Honor.

[00:31:32] Speaker 02:
And the situation about the statutory exemption is problematic because that presumes the issue that we're fighting, which is that Ethereum is a commodity and not a security.

[00:31:41] Speaker 02:
That statutory exemption says you're exempted from dealing with securities, which is what we fundamentally dispute.

[00:31:48] Speaker 02:
When Judge Wardlow asked about, well, can't you just get a no enforcement?

[00:31:53] Speaker 02:
The SEC said, no, you cannot, because we'll only give you a no-action letter.

[00:31:57] Speaker 02:
And what are the words that it used to describe that no-action letter?

[00:32:01] Speaker 02:
The comfort that it gives, not legally binding in any way, shape, or form.

[00:32:05] Speaker 02:
And one example of that is Coinbase had gone through the SEC in its registration statement saying it uses Ethereum, and the SEC signed off on an IPO, for example, saying, go ahead, go out into the wild.

[00:32:18] Speaker 02:
And then the SEC comes back four to five years later

[00:32:21] Speaker 02:
sues Coinbase for engaging in substantial federal securities violations.

[00:32:25] Speaker 02:
So a no action letter is no comfort at all.

[00:32:29] Speaker 02:
You also heard counsel talk about, you know, these are fear of marial issues of how to figure this out, a flow chart.

[00:32:36] Speaker 02:
Commodities are securities.

[00:32:38] Speaker 02:
There's a scorecard system.

[00:32:39] Speaker 02:
There's just no concrete ability for HODL law to know exactly what, if what it's doing is illegal or not.

[00:32:48] Speaker 02:
And again,

[00:32:49] Speaker 02:
I would just retreat to the fact that that is not, the investigation of HODL law is not the standard that this court should be looking at when it's coming to stand in.

[00:32:57] Speaker 02:
It's what is the realistic danger?

[00:32:59] Speaker 02:
Think about tomorrow if the SEC says utilizing Ethereum in the way that HODL law does is a federal securities violation.

[00:33:09] Speaker 02:
Not only does that dramatically destroy the price of the Ether token, it implicates the firm in federal securities violations, potential state bar issues,

[00:33:19] Speaker 02:
and all sorts of other things, a host of other issues.

[00:33:22] Speaker 02:
And again, in the standing inquiry, the court has to consider that, and the court has found standing in the past when no one's ever been prosecuted under the challenge provision.

[00:33:35] Speaker 02:
That's not a dispositive issue.

[00:33:37] Speaker 02:
And failure to disavow application of the law to the facts is another factor that is something to be considered in standing.

[00:33:46] Speaker 02:
The SEC just refuses to disavow that Ethereum and the Ether token are securities in the way that the law firm uses it.

[00:33:57] Speaker 02:
I would just go on to just briefly note that the Dow report mentioned two commissioners have issued a scathing dissent on the value and utility of that report.

[00:34:06] Speaker 02:
And again, with the personal opinion of Director Hinman,

[00:34:10] Speaker 02:
He also didn't disclose again that his speech went through approval and review of 18 different offices and divisions, the chair and the general counsel before he gave it.

[00:34:19] Speaker 02:
Thank you.

[00:34:20] Speaker 00:
All right.

[00:34:20] Speaker 00:
Thank you very much, counsel.

[00:34:22] Speaker 00:
Thank you.

[00:34:23] Speaker 00:
Hodo Law versus the Securities Exchange Commission is submitted, and this session of the court is adjourned for today.