As many of you are aware, the Securities and Exchange Commission issued a press release in regards to a report of investigation of The DAO, under section 21(a) of the Exchange Act. The report concluded that DAO tokens were securities, and are subject to US law.
The report went on to state…“U.S. Securities Laws May Apply to Offers, Sales, and Trading of Interests in Virtual Organizations” “…the Commission deems it appropriate and in the public interest to issue this Report in order to stress that the U.S. federal securities law may apply to various activities, including distributed ledger technology, depending on the particular facts and circumstances, without regard to the form of the organization or technology used to effectuate a particular offer or sale.”
The report provided long-sought clarity in stating that tokens issuing profits and any other promise of a return will most likely be considered a security and are subject to regulation from the SEC.
After reviewing and digesting the report several times, we reached out to our legal teams in Switzerland and the United States. They provided excellent feedback to the SEC’s release:The Howey test is the correct test for whether DAO-like tokens are securities. The Howey test is highly fact-specific, and not all tokens qualify as securities. Issuers that return profits to token holders post-sale are likely securities. Issuers of tokens that are securities are liable under the U.S. securities laws despite homing in Zug, Switzerland (or in other foreign jurisdictions), and despite being foreign residents or citizens.
The question not answered in the SEC report is whether utility tokens — created primarily for function rather than profit — will be considered a security.
When drafting the architecture of the REX token, we carefully reviewed the Howey Test to the token infrastructure. O...