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US SEC Reports That The DAO Tokens Qualify As Securities

In a groundbreaking report, the US Securities and Exchange Commission has concluded that tokens from The DAO are securities. This indicates that US securities laws may apply more broadly to token offerings and other virtual assets.

On July 25, 2017, the US Securities and Exchange Commission (SEC) published a report of investigation regarding The DAO. Per the report, “under the facts presented, the Commission has determined that DAO Tokens are securities under the Securities Act of 1933 and the Securities Exchange Act of 1934.” In an accompanying release, the SEC explained that “offers and sales of digital assets by ‘virtual organizations’ are subject to the requirements of the federal securities law.”

The report provides four criteria that illuminate why DAO Tokens are securities:

Foundational Principles of the Securities Laws Apply to Virtual Organizations or Capital Raising Entities Making Use of Distributed Ledger Technology Investors in The DAO Invested Money With a Reasonable Expectation of Profit Derived from the Managerial Efforts of Others

The agency has decided not to bring charges in the case of The DAO, but urges caution. US federal securities law applies regardless of whether the “issuing entity” is a regular company or a decentralized autonomous organization. Per the report, “The automation of certain functions through this technology, ‘smart contracts,’ or computer code, does not remove conduct from the purview of the US federal securities laws.” Whether the assets are purchased with dollars or virtual currency does not have any bearing.

Issuers of distributed ledger or blockchain-based securities must register their offers and sales “unless a valid exemption applies.” Unregistered offers could be liable for violations of securities laws. Furthermore, securities exchanges that provide trading of these assets must also register (unless a valid exemption applies). In the case of an open-source project like...

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