In its first official opinion on digital tokens, the United States Securities and Exchange Commission (SEC) released a report on its investigation into The DAO, a decentralised autonomous organisation that held its token sale in early 2016 and is most well-known for triggering the Ethereum blockchain hard fork. The report inspected whether DAO Tokens could be classified as securities and therefore fall within the scope of US securities law. The SEC found that DAO Tokens did constitute securities under the Securities Act of 1933 and the Securities Exchange Act of 1934, based on the application of the Howey test which asks:
- is there an investment of money?
- is there a common enterprise with a reasonable expectation of profits?
- are the profits derived from the entrepreneurial or managerial efforts of others?
Accordingly, DAO Tokens should have been registered with the SEC or an exemption from registration requirements applied for prior to the launch of the DAO tokensale.
More importantly, the SEC suggested that those who participate in unregistered offers, as well as the platforms that traded unregistered tokens, are also liable for violating securities laws. Exchanges that trade securities tokens must register as a national securities exchange or qualify for an exemption such as by being regulated as an alternative trading system.
Notably, the SEC did not issue a blanket securities classification for all crypto-tokens, instead suggesting that whether tokens were captured under US securities law depended on “facts and circumstances, including the economic realities of the transaction.”