Are ICOs Crowdfunding or Corporate Securities?

Spoiler alert: The SEC has weighed in. You know what this means.

Unites States Supreme Court

On July 25, 2017, the Securities and Exchange Commission (SEC) released a report detailing violations of the federal securities laws by DAO, an unincorporated organization whose sole purpose was to raise funds by selling blockchain tokens to investors. Well, that’s a bit of a surprise. To date, we haven’t been able to determine whether blockchain tokens represent currency or securities. Well, the SEC just answered our question.

DAO allegedly engaged in the unregistered offers and sales of DAO tokens in exchange for ether — worth around $150 million USD. While DAO characterized the enterprise as “crowdfunding”, the SEC did not find their fundraising efforts to fall within the crowdfunding exemption. According to the SEC, this was primarily because DAO was not a broker-dealer or a funding portal registered with the SEC.

Now, be aware that it’s still early. This is the result of an investigation launched by the SEC. For those who don’t know, that’s an executive agency. There are still two other branches of government (legislative and judiciary) who have yet to weigh in on the extent of SEC jurisdiction over organizations engaged in blockchain trading. At first blush, the SEC’s legal analysis seems pretty sound: that its jurisdiction encompasses capital raising and investment and the related offer and sale of securities — and that use of emerging technologies and interfaces to facilitate such capital raising and investment does not relieve the organization of a duty to comply with securities laws.

The SEC did make a note that whether an investment transaction involves the offer for the sale of a security is very fact-specific and depends on the circumstances of the case. And our legislature and judiciary will have plenty of opportunities to agree or disagree and create or interpret laws accordingly. So it does not appear that this is the final, indisputable word on blockchain. In any case, what is official is that the SEC has weighed in. TokenTrax will definitely be following this story and others like it. This is only the beginning.