The SEC issued a report today based on their recent investigation into The DAO and whether it violated SEC regulations. You can find links to the press release and full report here and here, respectively.

Here’s what I took away from the report.

1. DAO Tokens are securities

The SEC considers “investment contracts” securities and defines an investment contract as follows (page 11):

An investment contract is an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.

They go on to break down this sentence, clause by clause, to show why The DAO and its tokens fulfill this definition.

2. Centralized curation was a problem

The curation process for proposing projects for vote to The DAO played a key role in distinguishing DAO Token holders from The DAO’s “management team” (p14):

DAO Token holders could only vote on proposals that had been cleared by the Curators. And that clearance process did not include any mechanism to provide DAO Token holders with sufficient information to permit them to make informed voting decisions.

It’s hard to detangle whether central curation was the problem or if the Slock.it team didn’t do a good enough job with transparency and communication around the curation process.

3. The SEC doesn’t believe large-scale coordination of individuals is possible

The SEC further distinguishes token holders from management by citing a steep coordination cost for token holders to self-organize (p14):

The pseudonymity and dispersion of the DAO Token holders made it difficult for them to join together to effect change or to exercise meaningful control. Investments in The DAO were made pseudonymously (such that the real-world identities of investors are not apparent), and there was great dispersion among those individuals and/or entities who were invested in The DAO and thousands of individuals and/or entities that traded DAO Tokens in the secondary market — an arrangement that bears little resemblance to that of a genuine general partnership.

The SEC discounts Slock.it’s online forums as an effective platform for token holder organization, partially due to Slock.it not limiting registration to token holders. Perhaps this creates room in the market for an online community (protocol?) where registration requires provable ownership of a token? Again, it’s unclear to me in this case whether Slock.it’s specific behavior led to this ruling or if we can generalize.

Advice for Cryptocurrency Investors:

Proceed, but with caution

This specific report hasn’t changed much for me. I will continue investing in blockchain startups and in tokens directly. Some blockchain projects are obviously securities; I will continue to avoid those and if I were their founders I’d have a hard time sleeping because The SEC isn’t finished. Coinbase’s securities framework for tokens is generally good, though I wouldn’t take it as the word of law.

Blockchains are global and will survive whether the USA leads or not

Blockchains are global by default and token speculation continues to validate the public’s demand for financial risk taking. ICO’s are here to stay; all that will change is where “here” is located.