SEC – tokens can be ‘securities’

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U.S. Securities and  Exchange Commission – Action
  • SEC claims The DAO tokens are securities
  • That there are violations that have taken place
  • However has refrained from pursuing promoters
  • Motivation is deterrence
Motivation of action – deterrence
  • In “light of the facts and circumstances, the agency has decided not to bring charges in this instance, or make findings of violations in the Report, but rather to caution the industry and market participants:  the federal securities laws apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology.”
Definition of security
  • SEC are convinced The DAO tokens are securities
  • Irrelevant in definition the form or the fact that virtual currency was used to purchase the tokens
  • Clarified that ‘profits’ includes “‘dividends, other periodic payments, or the increased value of the investment”
  • Definition: “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others”
  • Howey definition was referenced. SEC found that DAO token holders had no managerial control. That the token holders “had little choice but to rely on their expertise”.
Potential violation was offering the unregistered securities
  • “unless a registration statement is in effect as to a security, it is unlawful for any person, directly or indirectly, to engage in the offer or sale of securities in interstate commerce”
  • Likely that the actions of Slock It in promoting The DAO violated this clause. Reason being that those who have a necessary role in the transaction are held liable as participants.
Exchanges potentially liable
  • Additionally, securities exchanges providing for trading in these securities must register unless they are exempt
References https://www.sec.gov/litigation/investreport/34-81207.pdf

https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-initial-coin-offerings