On July 25, 2017, the Securities and Exchange Commission issued a Report following their investigation of The DAO.  The DAO is an unincorporated organization that is just one example of a “Decentralized Autonomous Organization” –  a virtual organization embodied in computer code and executed on a distributed ledger or blockchain.

The DAO was formed in 2015 as unique form of crowdfunding whereby participants would vote on proposals and be entitled to rewards.  Between April and May of 2016, The DAO offered and sold approximately 1.15 billion DAO Tokens in exchange for approximately 12 million Ether.  Ether is a form of virtual currency.  These DAO Tokens gave the holder certain voting and ownership rights.

Token holders could vote on predetermined proposals deciding where The DAO invested its money, with each token holder’s vote weighted according to how many DAO Tokens he or she held.  On June 17th, 2016, an unknown individual or group attacked The DAO and appropriated approximately 1/3 of the total funds.  Although the funds were eventually recovered by The DAO, the SEC began investigating the attack and The DAO.  Ultimately, the SEC determined that an Enforcement Action was not necessary, however it issued a report laying out how the Securities Act and the Securities Exchange Act applies to The DAO and similar entities.

Section 5 of the Securities Act prohibits entities not registered with the SEC from engaging in the offer or sale of securities in interstate commerce.  Upon investigation of the circumstances surrounding The DAO, the SEC stated that The DAO qualifies as an “issuer” and thus must register as such with the SEC in order to sell DAO Tokens – which the SEC considers to be securities – in compliance with federal securities laws.  Given the SEC’s flexible interpretation and application of the Act, this Report is a caution to virtual entities that the federal securities laws are applicable and that the SEC intends to pursue enforcement of these laws in the field of virtual currencies and securities.

Tags: Banking, Christopher Kelly, Joseph Pastore, Security