The US Securities and Exchanges Commission has released an 18 pages long investigatory report which concludes the DAO itself issued securities. The SEC says:
“The DAO, an unincorporated organization, was an issuer of securities, and information about The DAO was “crucial” to the DAO Token holders’ investment decision…
The DAO was “responsible for the success or failure of the enterprise,” and accordingly was the entity about which the investors needed information material to their investment decision.”
Issuers of securities need to be registered, the SEC says, but the report doesn’t directly say how the DAO could have been registered or who could have been liable for its failure to register. They strongly imply, however, its coders – in this case Slockit – are liable:
“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.” More importantly:
“[W]hen a person [or entity] organizes or sponsors the organization of limited partnerships and is primarily responsible for the success or failure of the venture for which the partnership is formed, he will be considered an issuer.”
The report leaves little doubt that in SEC’s view Slockit and the Curators where primarily responsible. The SEC says:
“The expertise of the DAO’s creators and Curators was critical in monitoring the operation of The DAO… and, Slock.it and its co-founders did, in fact, actively oversee The DAO.”
SEC says the DAO tokens are securities under Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act, which 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.”
Analyzing previous cases, the commission says the “investment of money” doesn’t actually have to be cash, it “may take the form of ‘goods and services,’ or some other ‘exchange of value’,” they say.
Regarding the last part of the definition, as stated earlier, they find Slock.it and the curators exercised a managerial role due to promoting the DAO, controlling what address could be whitelisted for funding, and overseeing its operations, with the token holders having limited voting rights comparable to corporate shareholders, they say. However, no charges will be brought:
“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 [digital] currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology.”
Moreover, exchanges that offer token trading need to be registered as a national securities exchange, the SEC says, concluding that:
“The Platforms that traded DAO Tokens appear to have satisfied the criteria of Rule 3b-16(a) and do not appear to have been excluded from Rule 3b-16(b). As described above, the Platforms provided users with an electronic system that matched orders from multiple parties to buy and sell DAO Tokens for execution based on non-discretionary methods.”
The SEC says “the purpose of the registration provisions of the federal securities laws is to ensure that investors are sold investments that include all the proper disclosures and are subject to regulatory scrutiny for investors’ protection.”
But some may find the intervention as too soon, the findings not quite correct because corporate shareholders do not physically control the assets like DAO token holders did, the lack of any exemption – say ICOs below $20 million – as far too restrictive, and the absence of any public consultation as undemocratic.
Although fair disclosure requirements, as well as quarterly reports, would be welcomed, the lack of nuance – an ICO with a cap of $1 billion should have different requirements to an ICO with a cap of $1 million – suggests a bull in a china shop approach. Not least because the SEC is using this “investigatory report” to reach sweeping conclusions:
As such, all eyes now turn to London, Switzerland, Singapore and other jurisdictions with London, in particular, having previously shown great foresight and a far more nuanced approach towards this decade’s most innovative technology.