SEC's first investigation report on a token sale

The blockchain, entrepreneurial and investment community are passionately discussing the SEC's report on the investigation of the token sale determined to be in violation of the U.S. securities laws. Although, everybody felt that this is a milestone for the developing blockchain sector, a very few people actually read the entire report and understood what this is all about. Because the press-release along with the report itself (see below) is a typical TLDR, we summarize here everything you need to know from them to stop the panic.

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#1 The SEC's report is related to the investigation of one specific entity — a Decentralized Autonomous Organization ("DAO"), an unincorporated organization, created by Slock.it UG, a German corporation and its founders. Therefore, this conclusion of the SEC is only relevant to this specific case, and does not generalize the entire market of token sales.

#2 Based on the investigation, the Security and Exchange Commission has determined that DAO Tokens are securities under the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”), and that Slock.it’s co-founders and intermediaries may have violated the federal securities laws of the U.S.

#3 The SEC has decided not to bring charges in this case, or make findings of violations in the Report, but rather to caution the industry and market participants. For all other offerings, SEC emphasizes that "whether or not a particular transaction involves the offer and sale of a security — regardless of the terminology used — will depend on the facts and circumstances, including the economic realities of the transaction."

A spot-on summary comes from Stan Miroshnik, Managing Director of The Element Group, an avantgarde full-service investment bank for the digital token capital markets that has led such successful ICOs like Storj, and even the first ICO of a venture fund for Blockchain Capital:

"The report confirms that the Howey test is the right frameworks to analyze and structure token sales, and that tokens with dividend, profit participation, and voting features will likely be deemed securities. Today, most transactions are structured as utility tokens, which do not have these features, and the report was silent on the practice. The SEC is clearly engaged in the space and more guidance and clarity is most welcome."

Marco Santori, partner at Cooley, LLP, one of a very few law firms specializing on blockchain transactions, decodes the report for our subscribers.


UPD: Tim Draper, a prominent venture capitalist, published an open letter to the SEC straight off the ice: