Introduction - the SEC report
I came across an interesting story yesterday courtesy of Coindesk.
As many of you know I was originally a big proponent of the SlockIt DAO last year.
One of the main questions that kept coming up again and again in the discussions on DAOhub (the official discussion forum) was the legality of such an endeavour.
There was no obvious resolution to this at the time. For one thing, the DAO was an international endeavour and nothing quite like it had been done before.
Different countries have different laws and what is legal in one is not always legal in another.
However some of the larger and more powerful nations, like the US, have a large say in what happens overall. Smaller nations often follow their lead.
It was rumoured at the time that the US SEC (Securities and Exchange Commission) was looking into the matter.
They released their report yesterday which you can download here.
SEC Summary Excerpt
Here is an excerpt from the summary:
The investigation raised questions regarding the application of the U.S. federal securities laws to the offer and sale of DAO Tokens, including the threshold question whether DAO Tokens are securities.
Based on the investigation, and under the facts presented, the Commission has determined that DAO Tokens are securities under the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”).1
The Commission deems it appropriate and in the public interest to issue this report of investigation (“Report”) pursuant to Section 21(a) of the Exchange Act2 to advise those who would use a Decentralised Autonomous Organisation (“DAO Entity”), or other distributed ledger or blockchain-enabled means for capital raising, to take appropriate steps to ensure compliance with the U.S. federal securities laws.
All securities offered and sold in the United States must be registered with the Commission or must qualify for an exemption from the registration requirements.
In addition, any entity or person engaging in the activities of an exchange must register as a national securities exchange or operate pursuant to an exemption from such registration.
Although most of the discussion here is about the DAO the more important implications for this report (in my opinion) are in regards to ICOs:
My Thoughts On What They Are Saying
There is a huge amount I could write on this but I will keep it succinct. Basically from what I can ascertain:
Reducing administrative/regulatory burden is part of the attraction for ICOs.
The SEC considers the DAO and ICOs in general to be securities and subject to securities law. There is a summary of the laws and requirements here.
This means that anyone issuing them in the US will need to be registered with the SEC.
It also means that exchanges trading them in the US will need to be registered.
If you examine the link I have provided in point 1 it goes through all the rules and regulations that must be followed and just a quick scan of it shows that it is actually quite onerous.
Part of the reason and rational for ICOs (and also DAOs) is to reduce the administrative burden created in large organisations.
Most of these ICO projects involve small teams for whom this kind of compliance could prove difficult, if not practically impossible.
What is a security? Source Investopedia.
Since the DAO has ceased to exist they no longer care about taking any action in relation to that - something which they make quite clear in the report.
It is also obvious that they will be expecting future ICOs to be compliant.
The question then becomes what, if any action, will be taken against existing ICOs?
Will US exchanges need to suspend trading of them until they become registered? Will the ICO issuers need to register with the SEC after the fact?
I would love the opinions of someone who has an understanding of the legal issues here.
A Chilling Effect on ICOs?
In my opinion there are a number of things that this ruling could cause to happen that could ultimately slow down growth in the ICO market:
Many ICOs may simply exclude US investors.
US exchanges may refuse to list new ICOs for trading.
Those ICOs that do want to register and trade in the US may take longer to come to market, be less efficient and find it harder to compete with competitors that don't.
There may be a general slowing of growth in the ICO market due to both uncertainty and a reduction in US investing as a result of the above.
Other nations may step in and take advantage of the gap left by the US.
Obviously the US is a huge market and one of the most important nations for tech innovation.
None of these outcomes are ideal and I think it hard to say for sure what will happen.
Ultimately it may mean that the US loses some of its prominence in the cryptocurrency sector and that other nations start taking more of a lead when it comes to ICOs and new business models.
What do you think? Please let me know your thoughts in the comments.
Thank you for reading
