Yesterday, the Securities and Exchange Commission (SEC) issued an investigative report concluding that certain tokens (or coins) offered and sold by The DAO, a virtual organization, were securities under the Securities Act of 1933 (1933 Act) and the Securities Exchange Act of 1934 (1934 Act).1The DAO offered and sold its tokens in exchange for Ether, a virtual currency, and the tokens were distributed through distributed ledger technology (sometimes referred to as "blockchain").
The DAO intended to invest the proceeds of its token offerings in certain projects intended to generate additional Ether as income, which The DAO would then, subject to the vote of the token holders, distribute to the holders or re-invest in another project. The DAO would only submit projects for a vote of token holders if the proposed projects had been reviewed and approved by one or more expert "curators," who were handpicked by The DAO's creator.
In the report, the SEC took the position that the tokens were securities because, among other things, the token holders could share in the potential profits from a project in which The DAO invested, and those profits were to be derived from the managerial and entrepreneurial efforts of The DAO's creator, the creator's co-founders, and the curators.
The SEC concluded that because the tokens were securities, their offer and sale should have been registered under the 1933 Act, unless an exemption existed. Further, the web-based platforms that supported secondary trading of the tokens should have been registered as a national securities exchange under the 1934 Act or operated pursuant to an exemption.
Wilson Sonsini's fintech practice recently issued a Wilson Sonsini Alert regarding the regulatory considerations of initial coin (or token) offerings and warned, among other things, that such offerings may constitute offerings of securities to which the securities laws would apply. The report echoes this sentiment. Wilson Sonsini's fintech practice believes that the report also provides the following lessons:
For more information about the report or any related matter, please contact any member of the fintech regulatory practice at Wilson Sonsini.
This Wilson Sonsini Alert was prepared by Amy Caiazza.