Following its investigation of the unincorporated organization known as The DAO, together with its co-founders and intermediaries, in July 2017 the Securities and Exchange Commission issued its report finding multiple violations of federal securities laws. Although the Commission determined not to pursue an enforcement action, the report serves notice that capital raising activities through disruptive paradigms nevertheless are subject to established legal requirements.
According to the report, The DAO was created by Slock.it UG, a German corporation, and Slock.it’s co-founders and used distributed ledger or blockchain technology to operate as a Decentralized Autonomous Organization. In 2016 The DAO sold approximately $150 million of its virtual currency, known as DAO Tokens, in exchange for the virtual currency known as Ether. The business purpose of The DAO was to generate returns by investing the proceeds from sales of DAO Tokens in specific projects that the DAO Token holders selected. The concept was to create unmanaged crowdfunded partnerships whose partners would determine how to invest the pooled funds. Adding another dimension of analytic complexity, the anticipated returns would be in the form of additional DAO Tokens convertible only into Ether.
The report found that, because the DAO Tokens were investment contracts, they were securities subject to the registration requirements of the Securities Act of 1933 and suggested that the co-founders of Slock.it were promoters, and that the web-based platforms that traded DAO Tokens were traded were securities exchanges required to be registered with the SEC under the Securities Exchange Act of 1934. The report strongly suggests that the co-founders may have been investment advisers under the Investment Advisers Act of 1940. In summary, “The automation of certain functions through this technology . . . does not remove conduct from the purview of the U.S. federal securities laws.”
Barton LLP maintains a securities law practice that can advise clients on issues relating to the raising of capital and purchases and sales of securities.
Should you have any questions regarding issues relating to the raising of capital and purchases and sales of securities, please contact William A. Newman.