United States: The SEC And ICOs: Putting The SEC's Determination That DAO Tokens Are Securities In Context

Last Updated: August 18 2017
Article by Adam T. Ettinger

On July 25, 2017, the U.S. Securities and Exchange Commission (?SEC?) issued a report ("Report") detailing its investigation into whether the DAO (an unincorporated ?decentralized autonomous organization?), Slock.it UG ("Slock.it"), Slock.it?s co-founders, and intermediaries violated the federal securities laws. The SEC determined that the tokens issued by the DAO are securities under the Securities Act of 1933 ("Securities Act") and the Securities Exchange Act of 1934 ("Exchange Act"), and advised those who would use a distributed ledger or blockchain-enabled means for capital raising to take appropriate steps to comply with the U.S. federal securities laws. However, the SEC decided not to pursue an enforcement action at this time.

The SEC has been watching the increase in ICOs for some time, and for good reason. The New York Times reported that $1.1 billion has been raised this year by companies, foundations, and decentralized autonomous organizations selling digital coins or tokens that are created and disseminated using distributed ledger or blockchain technology. Nearly all of these token sales have been characterized by their promoters as the sales of digital assets or currencies, rather than as the sale of securities, and have not been registered as securities in the United States.

Legal experts watching the ICO phenomena have been wondering and debating whether some of these digital tokens might have sufficient utilitarian function that their sale would not constitute the sale of securities. As a hypothetical example, imagine that in 1960, IBM wanted to develop and manufacture a new mainframe. Rather than sell more shares in IBM, it decides to sell 1 billion punch cards for $0.10 each and use the $100 million raised to pay for the development and manufacturing of the mainframe. Buyers of the punch cards could then use their punch cards to operate the mainframes. Hopefully, the value of those computations would exceed $0.10 for each punch card used. If so, the buyers could sell the punch cards at a profit.

Is the punch card a security? Many companies that have sold tokens in ICOs have taken the position that their tokens are more like punch cards, and merely the pre-sale of useful articles that will permit operation of the blockchain platform they have built or have yet to build.

The SEC did not give guidance or pursue an enforcement action that would clarify when tokens might possess sufficient utilitarian qualities such that their sales do not require compliance with U.S. securities law. Instead, focusing on the DAO, the Report identifies a particular set of circumstances that the SEC believes causes the token sale to constitute a sales of securities under U.S. securities law.

There are a number of interesting findings and conclusions in the Report:

  • The SEC had no trouble at all in determining that Slock.it was the promoter of the DAO and its tokens. As evidence of this, the Report states that Slock.it's founders launched a website to describe and facilitate the DAO token sale, solicited media attention by posting updates on websites on online forums, communicated to the public about how to participate in the DAO token sale, and retained the right to choose the "curators" that would determine what proposals to put to a vote by DAO token holders.
  • In applying the "Howey" test (SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946) as restated in SEC v. Edwards, 540 U.S. 389 (2004)), the SEC found that the DAO's investors relied on the managerial and entrepreneurial efforts of Slock.it, its co-founders, and the DAO's curators to manage the DAO and generate profits. This was sufficient to satisfy the element of the Howey test requiring that the profits would be derived from the entrepreneurial or managerial efforts of others, separately from the efforts of the investors.
  • The SEC did not analyze the question whether the DAO was an "investment company," that would fall under Section 3(a) of the Investment Company Act of 1940. However, the SEC states in the Report, "[t]hose who would use virtual organizations should consider their obligations under the Investment Company Act."
  • The SEC reviewed recordings of Slock.it's demonstrations and presentations at technology conferences to determine that the DAO was intended to be for-profit, and that the tokens were likened to "buying shares in a company and getting ...dividends." Examination of these kinds of records and materials is not surprising to attorneys that deal with SEC investigations. However, it may come as news to entrepreneurs that think their ICO whitepaper will be the sole, definitive document characterizing their tokens.
  • The SEC fired a warning shot to exchanges where tokens are traded. The SEC found that the exchanges that traded DAO tokens appear to satisfy the criteria for a trading system of securities regulated under the Exchange Act, which makes it unlawful for any exchange to effect any transaction in a security unless the exchange is registered as a national securities exchange or is exempted from such registration.
  • If anyone had any doubts, the Report makes it very clear that whether a token sale is called an "ICO" or is coded in a smart contract will do little affect the SEC's analysis into whether it constitutes the sales of securities.

The Investor Bulletin on Initial Coin Offerings.

Concurrently with the Report, the SEC issued an Investor Bulletin on Initial Coin Offerings("Bulletin") to make investors aware of potential risks of participating in token sales, often referred to as ICOs. The Bulletin was issued by the SEC's Office of Investor Education and Advocacy, with the objective of making investors aware of the potential risks of participating in ICOs. The Bulletin is neither a legal interpretation nor a statement of SEC policy.

As a reader of the Report would expect, the Bulletin states that, "[d]epending on the facts and circumstances of each individual ICO, the virtual coins or tokens that are offered or sold may be securities." Of course, this also means that depending on the facts and circumstances of each individual ICO, the virtual coins or tokens that are offered or sold may not be securities.

The Bulletin also includes a list of points to consider when purchasing tokens in an ICO. These points are grounded in decades of SEC experience dealing with securities fraud.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
23 Oct 2019, Other, Dallas, United States

Marketing Wants To Do What? Sweepstakes, Influencers, Loyalty, and Other Advertising and Promotional Fun

25 Oct 2019, Webinar, Los Angeles, United States

Matthew Bonovich will be a speaker at this webinar.

State and local governments continue to incentivize renewable energy and battery storage, causing an increase in mergers and acquisitions among producers and specialized renewables.

29 Oct 2019, Seminar, California, United States

Please join us for Sheppard Mullin's Labor & Employment Law Update & Happy Hour Seminar Series. There are many new developments in California labor and employment laws that will significantly affect the way you run your day-to-day business operations.

Similar Articles
Relevancy Powered by MondaqAI
Kramer Levin Naftalis & Frankel LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Kramer Levin Naftalis & Frankel LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions