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The SEC’s new Investigative Report concludes DAO Tokens were securities

On Tuesday (the 25th July) the US Securities and Exchange Commission (SEC) released a ‘Report of Investigation’ that confirms offers and/or sales of the digital assets of virtual organisations will now fall under the authority of the US’ federal securities laws. 

These transactions cover any offers/sales that employ distributed ledger or blockchain technology irrespective of the name the organisation driving the offer uses to frame the transaction, e.g. an Initial Coin Offering (also known as an ICO) or Token Sales.  It is a more concrete standpoint which led Steven Peikin, Co-Director of the SEC’s Enforcement Division, to comment:

"As the evolution of technology continues to influence how businesses operate and raise capital, market participants must remain cognizant of the application of the federal securities laws."

The main focus of this week’s Report of Investigation were tokens offered and sold by a virtual organisation known as ‘The DAO’.  The report states those tokens were indeed securities and, as such, were subject to federal securities laws.

The SEC's inquiry into The DAO stemmed from the agency’s Enforcement Division’s fear that both The DAO (and the entities and individuals affiliated with them) had violated federal securities laws by offering DAO Tokens in exchange for the virtual currency Ether without prior registration.  To add to their suspicions their offer had been promoted as a ‘crowdfunding contract’.  However, to the SEC, there was no way they could have claimed exemption under Regulation Crowdfunding because neither a broker-dealer nor a funding portal had been registered with the SEC and the Financial Industry Regulatory Authority.

The report goes on to explain that the issuers of distributed ledger or blockchain technology-based securities must register any offer and/or sale of anything that could be termed a security unless they can demonstrate they are protected by a valid exemption.  This means anyone involved in an unregistered offering will be judged as violating US securities laws. 

However it’s important to remember that the commentary isn’t solely aimed at the organisations behind offerings involving digital assets; the securities exchanges supporting these types of trades are also under scrutiny and must now also register unless, again, they can prove they are exempt. 

The document then goes on to reinforce the primary purpose of these new requirements is simply to provide investors with an extra layer of protection.  The SEC claim they simply want to make sure that when investors are sold investments, all the proper disclosures are available and open to regulatory scrutiny as William Hinman, the SEC’s Director of the Division of Corporation Finance explains:

“Investors need the essential facts behind any investment opportunity so they can make fully informed decisions, and today's Report confirms that sponsors of offerings conducted through the use of distributed ledger or blockchain technology must comply with the securities laws."

It was also interesting to note the SEC has decided not to press charges against THE DAO at the present time but seeks to use its findings as a way of forewarning everyone involved in this type of trading that the federal securities laws do apply to those who offer and sell securities in the United States.

They have also clearly underlined their guidance is equally as valid whether the entity making the offer is a traditional company or a virtual organisation, whether the trade is made in US$ or in virtual currency and irrespective of the technology involved.

If you think you may have become the victim of a fraudulent ICO or have found yourself facing a dispute involving any other form of digital fraud, we can help.  To discuss how to tackle any fraudulent activity call us on 020 7792 5649 or email us at info@selachii.co.uk and one of our experienced digital dispute resolution specialists with be more than happy to help.

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