SEC Investigation into the DAO’s Initial Cryptocurrency Offering (ICO)


I’m attorney Laura Anthony founding partner
of Legal & Compliance, a full service corporate, securities, and business transactions law
firm. Today is the continuation in a LawCast series
talking about SEC’s recent investigation and public statements on initial cryptocurrency
offerings or ICOs. On July 25, 2017, the SEC issued its Report
on an investigation into an ICO and related activities by the DAO, which is an unincorporated
entity, Slock It, which is a German corporation, and various principals and participants in
the offering. Although the report provides a platform for
which the SEC can educate the marketplace, it did not pursue enforcement actions against
the targets of the investigation. The DAO stands for a decentralized autonomous
organization, or a virtual network embodied in computer code on a DLT or blockchain. The DAO was created by Slock It to sell tokens
to investors, which proceeds would be used to fund for-profit projects. The token holders would share in the profits
and, as such, had an expectation of a return on investment. The DAO tokens were also transferable and
available for secondary trading on different web-based platforms. After the ICO, but before projects were funded,
the DAO was hacked and approximately one-third of its assets were stolen. Fortunately, the DAO was able to come up with
a plan that caused the return of the etherium raised from the DAO back to their original
ethereum address and thus return investments to the original investors. The plan was called a fork. The SEC opened an investigation as to whether
the offer and sale of the DAO Tokens invoked federal securities laws, whether the DAO Tokens
were securities themselves and whether the platforms for the secondary trading of the
Tokens required registration as a securities exchange. The answer to each of these questions, under
the facts and circumstances presented, was in the affirmative; it was yes. Since the DAO had not yet commenced operations,
the SEC did not review whether the DAO was acting as an investment company under the
Investment Company Act of 1940, but did note that had they begun operations, such an analysis
would have been appropriate. The Report begins with the conclusion. Whether or not a particular transaction involves
the offer and sale of a security depends on an analysis of the facts and circumstances,
regardless of the terminology or technology used or employed. All persons or entities that use a Decentralized
Autonomous Organization, or a DAO Entity, DLT, Distributed Ledger Technology or other
blockchain-based technology as a means to raise capital in the U.S. are subject to the
U.S. federal securities laws. All securities offered and sold in the U.S.
must be registered or must qualify for an exemption from registration. Moreover, any entities or platforms that allow
for the secondary trading of securities must either be registered as a national securities
exchange or operate pursuant to a registration exemption. The automation of functions, computer code,
smart contracts, and decentralization does not change the obligations under the federal
securities laws. I’m securities attorney Laura Anthony, founding
partner of Legal & Compliance, and producer of LawCast. Should you have any questions about today’s
topic, please visit SecuritiesLawBlog.com and LawCast.com, or contact me directly. Inquiries of a technical nature are always
encouraged.

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