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The U.S. Securities and Exchange Commission (SEC) has announced that Initial Coin Offerings (ICOs) and token sales are subject to federal securities laws. The announcement follows a report based on an investigation into The DAOâs token sale in 2016, in which the Commission found DAO tokens to be securities.
Also read: ICO Hype Attracts Investors but Also Skeptics and Regulators Worldwide
Federal Securities Laws Apply to ICOs and Token Sales
The Securities and Exchange Commission (SEC) on Tuesday issued a report following its investigation into the collapse of The DAO. The agency subsequently announced that:
Offers and sales of digital assets by âvirtualâ organizations are subject to the requirements of the federal securities lawsâŠSuch offers and sales, conducted by organizations using distributed ledger or blockchain technology, have been referred to, among other things, as âInitial Coin Offeringsâ or âToken Sales.â
However, the Commission noted that not every transaction involves the offer and sale of a security, which âwill depend on the facts and circumstances, including the economic realities of the transaction.â Nonetheless, Stephanie Avakian, co-director of the SECâs Enforcement Division reiterated that âthe innovative technology behind these virtual transactions does not exempt securities offerings and trading platforms from the regulatory framework.â
Overall, the SEC asserted that federal securities laws apply to those who offer and sell securities in the United States regardless whether or not:
- the issuing entity is a traditional company or a decentralized autonomous organization,
- the securities are purchased using U.S. dollars or digital currencies, and
- they are distributed in certificated form or through distributed ledger technology.
Registration Required
According to the report, tokens offered and sold by The DAO âwere securities and therefore subject to the federal securities law.â In addition:
Issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies⊠Additionally, securities exchanges providing for trading in these securities must register unless they are exempt.
Director of the Division of Corporation Finance, William Hinman, said that âinvestors need the essential facts behind any investment opportunity so they can make fully informed decisions.â
The Case Leading to the Investigative Report
The report was issued following an investigation into whether The DAO, Slock.it, Slock.itâs co-founders, and intermediaries may have violated federal securities laws. âThe DAO was created by Slock.it and Slock.itâs co-founders, with the objective of operating as a for-profit entity that would create and hold a corpus of assets through the sale of DAO tokens to investors, which assets would then be used to fund âprojectsâ,â the SEC described in its report.
However, after DAO tokens were sold but before any projects were funded, an attacker exploited its flawed code and stole approximately one-third of its assets, the SEC detailed. The subsequent investigation into the hack raised questions whether federal securities laws apply to the offer and sale of DAO tokens and whether these tokens were securities. Based on the facts presented, the Commission has determined that:
DAO tokens are securities under the Securities Act of 1933 (âSecurities Actâ) and the Securities Exchange Act of 1934 (âExchange Actâ).
In the case of The DAO, the Commission has decided not to pursue an enforcement action at this time but it has published a bulletin to educate investors on ICOs. âThe bulletin reminds investors of red flags of investment fraud, and that new technologies may be used to perpetrate investment schemes that may not comply with the federal securities laws,â the SEC described.
Meanwhile ICO hype has attracted regulators worldwide, along with investors and skeptics. Recently, Russia revealed that it is working on a regulatory framework for ICOs.
What do you think of the SECâs decision to classify DAO tokens as securities and apply federal securities laws to ICOs? Let us know in the comments section below.
Images courtesy of Shutterstock, Wikipedia, The DAO
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The post SEC Declares DAO Tokens Securities and ICOs Subject to Federal Securities Laws appeared first on Bitcoin News.
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