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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 âofficialâ ruling means the SEC may start cracking down on token sales based in the states.
âThe 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.â
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 âinvestment contract.â The SEC defines an investment contract as âan investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.â
The key word here is profits from âentrepreneurial or managerial efforts of others.â 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 holdersâ rights were limited because any proposals would first have to be approved by a team of curators.
âDAO Token holders were substantially reliant on the managerial efforts of Slock.it, its co-founders, and the Curators. Even if an investorâs efforts help to make an enterprise profitable, those efforts do not necessarily equate with a promoterâs significant managerial efforts or control over the enterpriseâ
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 SECâs report:
âThe definition of âissuerâ is broadly defined to include âevery person who issues or proposes to issue any securityâ and âpersonâ includes any unincorporated organization.â
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 organizationâs day to day operations the SEC deemed it to be a valid issuer of securities.
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