DAO Token Archives - Securities Law Blog

Regulation By Enforcement

The SEC is well known for, and often criticized for, its practice of regulation by enforcement. In recent years the SEC has been more willing to regulate by enforcement, propounding novel and new interpretations to longstanding rules and regulations. Market participants have taken notice, and offense. Advocacy groups have been very vocal against the practice including the Financial Services Institute and Small Public Company Coalition (SPCC).

Although not limited to matters involving cryptocurrencies, blockchain and all things Web3, is the area that garners the most attention for the SEC’s enforcement-based guidance, probably because it is undeniably the topic that is in the most need of actual rule-based regulation. Starting with the SEC’s 2017 Section 21(a) Report stemming from the enforcement action against the DAO, Slock.it (see HERE), almost all substantive regulatory prescription related to the world of crypto has come from enforcement actions.

Rather than heed the calls for rules and regulations over the years, the SEC has

March 29, 2022

Hester Peirce Proposal For Treatment Of Cryptocurrency

SEC Commissioner Hester M. Peirce, nicknamed “Crypto Mom,” has made a proposal for the temporary deregulation of digital assets to advance innovation and allow for unimpeded decentralization of blockchain networks. Ms. Peirce made the proposal in a speech on February 6, 2020.

The world of digital assets and cryptocurrency literally became an overnight business sector for corporate and securities lawyers, shifting from the pure technology sector with the SEC’s announcement that a cryptocurrency is a security in its Section 21(a) Report on the DAO investigation. Since then, there has been a multitude of enforcement proceedings, repeated disseminations of new guidance and many speeches by some of the top brass at the SEC, each evolving the regulatory landscape. Although I wasn’t focused on digital assets before that, upon reading the DAO report, I wasn’t surprised. It seemed clear to me that the capital raising efforts through cryptocurrencies were investment contracts within the meaning of SEC v.

March 3, 2020

SEC And FINRA Joint Statement On Custody Of Digital Assets

On July 8, 2019, the SEC’s Division of Trading and Markets and FINRA’s Office of General Counsel issued a joint statement on broker-dealer custody of digital asset securities (“Joint Statement”). The SEC and FINRA have been discussing issues of custody related to tokens and digital assets for years. For example, issues surrounding the custody of digital assets have been continuously cited by the SEC as one of the reasons for the failure to approve a cryptocurrency ETF.

The Joint Statement begins with the admission that historical rules do not adequately cover the complex issues related to digital assets, including rules related to the loss or theft of a security. In recent months the SEC and FINRA staff have been engaging in conversations with industry participants regarding how the rules could be applied or modified to suit the needs of the emerging technology of digital assets.

Any entity that transacts business in digital asset securities must comply with the federal securities

August 6, 2019

Securities Token Or Not? A Case Study – Part III

This is the third part in my three-part series laying out fact patterns and discussing whether a specific digital asset is a security, a utility, currency, commodity or some other digital asset. In Part 1 of the series, I examined a decentralized token that had been issued without any concurrent capital raise and was able to conclude such token was not a security. Part 1 can be read HERE. In Part 2 I examined a token that was issued with the intent of being a utility token, but as a result of the clear speculative motivation for purchasers, and the lack of decentralization, concluded it was a security. Part 2 can be read HERE.

In this Part 3 of the series, I examine the issuance of the Free Token as a dividend and its cousin the Bounty Token. Unlike the prior blogs in this series, which examined the question of whether a particular token is a security, this blog

October 9, 2018

Securities Token Or Not? A Case Study – Part II

This is the second part in my three-part series laying out fact patterns and discussing whether a specific digital asset is a security, a utility, currency, commodity or some other digital asset. Although the first and easy answer is that if a digital asset is being issued today, it is most assuredly a security upon issuance that needs to comply with the federal securities laws, the answer is not always that straightforward for digital assets that have been in the marketplace for a period of time, such as Bitcoin and Ether, or for new digital assets that are carefully being constructed to fall outside the purview of a securitized token.

In the first part of this series, we examined the Oldie Token and, under the fact pattern presented, was able to determine that the Oldie Token was not a security. Part 1 can be read HERE. In this part we will examine the Functional Token, which has not

October 2, 2018

Security or Utility Token? A Case Study – Part I

Is it a security or is it a utility, currency, commodity or some other digital asset? That question has been continuously raised by those working with digital assets such as cryptocurrencies, virtual coins and tokens, including by digital asset issuers and companies that run platforms for the issuance or trading of such digital assets. Although the first and easy answer is that if a digital asset is being issued today, it is most assuredly a security upon issuance that needs to comply with the federal securities laws, the answer is not always that straightforward for digital assets that have been in the marketplace for a period of time, such as bitcoin and ether, or for new digital assets that are carefully being constructed to fall outside the purview of a securitized token.

The “STO” standing for security token offering has quickly gained favor alongside “ICO” with an industry-understood distinction. An STO is designed to

September 25, 2018

SEC Issues Report on Initial Coin Offerings (ICO’s)

On July 25, 2017, the SEC issued a report on an investigation related to an initial coin offering (ICO) by the DAO and statements by the Divisions of Corporation Finance and Enforcement related to the investigative report (the “Report”). On the same day, the SEC issued an Investor Bulletin related to ICO’s. Offers and sales of digital coins, cryptocurrencies or tokens using distributed ledger technology (DLT) or blockchain have become widely known as ICO’s. For an introduction on DLT and blockchain, see HERE.

The basis of the report is that offers and sales of digital assets, including cryptocurrencies, are subject to the federal (and state) securities laws. From the highest level, the nature of a digital asset must be examined to determine if it meets the definition of a security using established principles (see HERE). In addition, all offers and sales of securities must either be registered with the SEC or there must be an available exemption

August 15, 2017

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DAO Token

Regulation By Enforcement

Hester Peirce Proposal For Treatment Of Cryptocurrency

SEC And FINRA Joint Statement On Custody Of Digital Assets

Securities Token Or Not? A Case Study – Part III

Securities Token Or Not? A Case Study – Part II

Security or Utility Token? A Case Study – Part I

SEC Issues Report on Initial Coin Offerings (ICO’s)

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