SEC Says Offerings From All-Robot Firms Count as Securities

Chris Gaetano
Published Date:
Jul 27, 2017

The Securities and Exchange Commission said that tokens offered by the Decentralized Autonomous Organization (DAO), a venture capital fund that is run entirely by machines, count as securities. The DAO made waves last year by raising over $130 million through asking people to use crypto-currencies to buy "DAO tokens" that gave them the ability to make vote on decisions and get rewards if those decisions bear fruit. While those who created the DAO explicitly said this does not represent an equity stake, the SEC was skeptical. After spending more than a year investigating how the DAO operates, it came to the conclusion that these tokens counted as securities and therefore subject to federal securities law. This means that the initial round of funding where the robot-run firm got its initial $130 million counted as an unregistered offer; the DAO did not meet the requirements of the Regulation Crowdfunding exemption because, among other things, it was not a broker-dealer or a funding portal registered with the SEC and the Financial Industry Regulatory Authority. 

"The innovative technology behind these virtual transactions does not exempt securities offerings and trading platforms from the regulatory framework designed to protect investors and the integrity of the markets," said Stephanie Avakian, Co-Director of the SEC's Enforcement Division. 

The report said that any issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies. Those participating in unregistered offerings also may be liable for violations of the securities laws. Additionally, securities exchanges providing for trading in these securities must register unless they are exempt.

The SEC, however, decided not to bring charges in this case, or make findings of violations in the report. Instead, it cautioned the industry and market participants that federal securities laws apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology.

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