United States: SEC Report On ICOs And Token Sales – "If It Sounds Too Good To Be True…"

Last Updated: August 18 2017
Article by Stacie S. Aarestad and Daniel S. Clevenger

On July 25, 2017, the SEC issued an investigative report to advise those who have used or may consider using a virtual organization or capital raising entity that uses distributed ledger or blockchain technology to facilitate capital raising that these activities are subject to U.S. federal securities laws. The SEC also released an investor bulletin to educate and caution potential investors about this new and growing type of capital raising.

Although the SEC determined not to pursue an enforcement action in the instant case, the report concluded that the tokens at issue in the investigation were securities and that, therefore, the offering and sale of the tokens was subject to U.S. federal securities laws. This report confirms that the SEC will look to the facts and circumstances of transactions to determine whether they constitute offerings of securities subject to U.S. federal securities laws. As such, it has broad implications for market participants that assumed sales of digital assets by "virtual" organizations (such as "Initial Coin Offerings" or "Token Sales") were outside the scope of these laws.

Summary Facts

The SEC's investigation related to the activities of The DAO, an unincorpoated organization, Slock.it UG, a German corporation, and Slock.it's co-founders and intermediaries in the offer and sale by The DAO of approximately 1.15 billion DAO Tokens in exchange for approximately 12 million Ether (ETH)1, which were valued at approximately $150 million at the time the offering closed.

The DAO is a virtual organization embodied in computer code and executed on a distributed ledger or blockchain. Slock.it and its founders created The DOA to raise funds, through the sale of DAO Tokens to investors, to fund future projects. The DAO Tokens were offered to the public without restrictions.2 Slock.it's founders promoted The DAO through media reports, website updates and online forums. Secondary trading of DAO Tokens was also supported by a number of web based platforms.3

Holders of DAO Tokens had certain voting and ownership rights. The holders would also be eligible to receive a return based on the projects funded by The DAO, which would be chosen by a vote of the holders. Proposed projects were vetted by one or more "curators" of The DAO; curators had sole control over what proposals could be submitted to and voted on by holders of DAO Tokens and ultimately funded by The DAO.

A hack occurred at The DAO during the offering period in May 2016 and approximately one-third of the total ETH raised in the offering was moved into an account controlled by the hacker. In response to the hack, Slock.it and its founders took steps designed to restore the DAO Tokens to affected holders.


In its review of the offering by The DAO, the SEC concluded that the principles underlying the securities laws apply to virtual organizations or capital raising entities making use of distributed ledger technology. The substance of the transaction and not its novel form is determinative.

The SEC found that DAO Tokens constituted an investment contract in which an investment of money is made in a venture where the investor has a reasonable expectation of profits that would be derived from the efforts of others—the classic definition of a security for purposes of Section 2(a)(1) of the Securities Act. The fact that ETH was the currency used to purchase DAO Tokens, as opposed to cash, was found to satisfy the investment of "money" for this purpose. The efforts of Slock.it, its founders and the curators were seen as essential managerial efforts affecting the failure or success of the enterprise. The holders of DAO Tokens relied on these parties, as highlighted by the actions taken by Slock.it and its founders in response to the hacking attack.

The SEC concluded that the voting rights provided to holders of DAO Tokens, which included a vote regarding what proposals would be funded, did not provide them with meaningful control over the enterprise. The SEC noted that the ability to vote for proposals was largely perfunctory—as the proposals were subject to clearance by the curators and did not provide sufficient detail with respect to their terms. The facts that the DAO Token holders were widely dispersed, held under pseudonyms and were provided with limited opportunity for communication with other holders also, per the SEC, prevented them from having meaningful control through voting.

The SEC noted that the term "issuer" is broadly defined and includes unincorpoated organizations and that case law has upheld a flexible construction of the term to capture novel capital raising transactions. The SEC also cautioned others who participate in an unregistered offer and sales of securities not subject to a valid exemption that they may also be acting in violation of federal securities laws.


The SEC used its investigative report to illustrate the application of the federal securities laws to the emerging virtual markets that are operating worldwide. The analysis of the token offering by The DAO offers a roadmap of the facts and circumstances under which these offerings will be subject to U.S. federal securities laws. Because these types of offerings are expected to continue to proliferate with endless possible variations, it will continue to be a facts and circumstances determination as to the application of these laws in any given circumstance. In addition to warning virtual organizations that the securities law requires the investors receive the information necessary to make an informed investment decision, the SEC provided information directly to potential investors to educate them on the nature of these burgeoning investment opportunities.


1. ETH is a virtual currency based on the Ethereum Blockchain.

2. Anyone was eligible to purchase DAO Tokens. There were no limitations on the number of DAO Tokens offered, the number of purchasers or the level of sophistication of the purchasers.

3. Although the SEC's primary focus centered on the applicability of the securities laws to the offer and sale of tokens, virtual trading platforms were also cautioned that systems that meet the definition of an exchange under the Exchange Act must operate as a National Exchange or pursuant to an exemption from such registration.

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
25 Oct 2017, Webinar, Boston, United States

Foley Hoag will present a 60-minute webinar on Wednesday, October 25 at 12:30 pm EDT, offering guidance for in-house counsel regarding the basics of trademark and design protection in the European Union. Attendees will learn about the opportunities and pitfalls to be on the lookout for when looking to secure, protect, and enforce an IP portfolio overseas.

1 Nov 2017, Webinar, Boston, United States

Please join Foley Hoag on Wednesday, November 1, 2017 for a webinar that covers the details of drafting an appropriate arbitration clause for your company’s commercial contracts.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.