SEC Focuses on Initial Coin Offerings: Tokens May Be Securities Under Federal Securities Laws

On July 25, 2017, the SEC’s Division of Enforcement issued a Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO (DAO Report). This report indicates that “The DAO is one example of a Decentralized Autonomous Organization, which is a term used to describe a “virtual” organization embodied in computer code and executed on a distributed ledger or blockchain.” The DAO Report concludes that the digital tokens, which were issued for the purpose of raising funds for projects, may be deemed to be securities under the federal securities laws. According to the SEC, such securities must be registered with the Commission or eligible for an exemption from the registration requirements. The same day, the SEC’s Office of Investor Education and Advocacy issued an Investor Bulletin, addressing the topic of ICOs more generally. Concurrently, the SEC’s Divisions of Corporation Finance and Enforcement released a joint statement supporting the DAO Report and Investor Bulletin. In their statement, the Divisions noted that “the issue of whether a particular investment opportunity involves the offer or sale of a security – regardless of the terminology or technology used in the transaction – depends on the facts and circumstances, including the economic realities and structure of the enterprise.”

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