- The 2017 DAO report from the SEC changed the landscape of ICO token sales
- This was the moment the SEC ruled that tokens from DAOs should be considered securities
- The ruling it still being debated in court today
In 2017 the Securities and Exchange Commission released a long-awaited report on the nature of Decentralized Autonomous Organizations (DAOs) and a ruling as to whether tokens sold as part of their fundraising efforts should be classed as securities. Almost four years after its release we review the contents of the DAO report and its ramifications for the cryptocurrency space.
The History
The reason why the SEC took it upon themselves to look into DAOs in the first place has its roots in a German company called Slock.it. Slock.it held an ICO in 2016 to raise money for their DAO, raising approximately $150 million in ETH, including from U.S. investors. However, Slock.it was hit by a hack that saw a third of the ETH taken, causing the project to hard fork and put the remaining funds (including the stolen ETH which was in fact trapped) into a recovery address where DAO tokenholders could swap their token back for their ETH.
SEC Rules that DAO Tokens Are Securities
This situation grabbed the SEC’s attention and prompted it to look into Slock.it from a securities perspective. They ruled that the Slock.it DAO did not ultimately contravene securities laws, but the similarities were enough to cause the SEC to look further into to what extent DAO tokens resembled securities in principle. The July 2017 DAO Report found that tokens offered and sold by DAOs should be considered securities and were therefore subject to the federal securities laws, although the rule wasn’t hard and fast:
Whether a particular investment transaction involves the offer or sale of a security – regardless of the terminology or technology used – will depend on the facts and circumstances, including the economic realities of the transaction.
The knowledge that the SEC was going to treat DAO ICOs as sales of securities meant that, in theory, any ICO that invited US investment needed to register with the SEC as a securities seller. As we know this very rarely happened during the 2017-18 ICO boom, which has resulted in a slew of retrospective lawsuits by the SEC in the years since.
Lawsuits Fights Set to Confirm Legal Status
The 2017 DAO ruling also led to an argument that runs to this day between cryptocurrency project creators and the SEC over the definition of a security. Kik Interactive CEO Ted Livingston invited the SEC to sue him over his assertion that his company’s Kik ICO could not be classed as a security, but he lost the case in October 2020.
The SEC’s 2017 DAO report changed the landscape for cryptocurrency fundraising in the U.S. just before it exploded, and it’s clear from the attitude of a certain element of the crypto community that the ruling should be challenged as tokens from DAOs don’t fit into the Howey test for securities. An ongoing case against Ripple by the SEC could go a long way to clarifying the court’s position on the matter, something that the crypto world is keenly waiting for.
