Categories: CryptoFinanceNews

The SEC Concludes DAO Tokens Were Securities

In a press release issued today, the SEC concluded that tokens that were part of The DAO project were in fact securities. What this means for current ICOs and future token sales is that they will have to abide by federal securities laws.

While many ICOs already exclude certain IP addresses from participating, this “official” ruling means the SEC may start cracking down on token sales based in the states.

“The Report confirms that issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies. Those participating in unregistered offerings also may be liable for violations of the securities laws.”

The report goes into detail about how The DAO project worked, who was behind it, and how investors could become part of the project. The report concluded that DAO tokens were in fact securities by definition, and went further to explain how the organization behind it acted as a securities issuer that should have been federally registered.

According to the Securities and Exchange Acts, a security is an “investment contract.” The SEC defines an investment contract as “an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”

The key word here is profits from “entrepreneurial or managerial efforts of others.” The DAO did allow for voting for new proposals and the direction in which the project goes, however, the SEC argued that the DAO token holders’ rights were limited because any proposals would first have to be approved by a team of curators.

“DAO Token holders were substantially reliant on the managerial efforts of Slock.it, its co-founders, and the Curators. Even if an investor’s efforts help to make an enterprise profitable, those efforts do not necessarily equate with a promoter’s significant managerial efforts or control over the enterprise”

As a result, because The DAO issued those investment contracts, and users were mostly reliant on the efforts of management to see a return on their contribution, the organization was a securities issuer. According to SEC’s report:

“The definition of “issuer” is broadly defined to include “every person who issues or proposes to issue any security” and “person” includes any unincorporated organization.”

In conclusion, even though the DAO was seemingly autonomous in its nature and the company was not incorporated, because management still had some involvement in the organization’s day to day operations the SEC deemed it to be a valid issuer of securities.

Mark

Mark is a 24 year old cryptocurrency entrepreneur. He was introduced to Bitcoin in 2013 and has been involved with it ever since. He used to mine bitcoins and altcoins but now focuses on blogging and educating others about digital currencies.

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