The US Securities and Exchange Commission (SEC) has halted an attempt by a Wyoming-based Decentralized Autonomous Organization (DAO) to register two crypto tokens.
Regulators denied American CryptoFed DAO LLC’s Form 10 (General Form for Registration of Securities) for two of its so-called security tokens.
The SEC’s Enforcement Division alleges that American CryptoFed included “materially deficient and misleading” information in its submission.
As regulators, the SEC’s primary mandate is to force issuers of securities to publish sufficient disclosures so that investors understand risks.
The agency does not make recommendations about the suitability of any security; it merely ensures that issuers disclose the truth about their operations so the public can make an informed decision.
- The DAO failed to include important information about its two tokens, “Ducat” and “Locke.”
- American CryptoFed didn’t sufficiently detail the company’s business, management, or financial condition.
- SEC regulators noted American CryptoFed DAO missed audited financial statements and contradicted itself about the securities status of its tokens.
The SEC’s Enforcement Division also opened administrative proceedings to determine if the SEC should deny or suspend American CryptoFed’s effective date for registering these two tokens.
An administrative law judge will rule on the American CryptoFed case, which is currently under investigation by the SEC’s Cyber Unit.
The SEC never approves cryptocurrencies
In 2019, the SEC issued a general investor alert in response to false claims by issuers of Initial Coin Offerings (ICOs) that the SEC had somehow “approved” their coin.
To be clear: The SEC does not approve coins, ever.
In the very best case, the SEC may elect to issue a No-Action Letter, assuring an issuer that it will not take legal action against them provided that they comply with the conditions stipulated in the letter.
Otherwise, issuers simply register with the SEC. The SEC then accepts that the forms are submitted, publishes relevant disclosures for the public, and begins its review. If needed, it will investigate further or contact the issuer for additional information.
That is all. There is never any “SEC approval.”
The SEC highlighted this in its American Cryptofed DAO court Order, noting the difference between simply filing paperwork versus passing any type of SEC personnel review for compliance.
Caveat emptor: Token issuers may fraudulently file a form with the SEC for an exemption to standard securities regulations, then use that form for promotions as a way to make the token seem legitimate.
Wyoming considers DAOs under the LLC umbrella
The State of Wyoming legally recognizes DAOs as a type of Limited Liability Company (LLC). The state does not actually recognize truly decentralized organizations per se.
Instead, it will allow a DAO to become a “company” and use some of the benefits of its LLC laws.
Its state legislature passed a bill clarifying the legal status of some DAOs as LLCs in April. That bill became law on July 1.
Unlike traditional LLCs, Wyoming’s Secretary of State can remove liability protections if a DAO LLC conducts illegal or fraudulent activity.
Professor Aaron Wright of Cardozo Law School helped draft the bill.
Wright has previously praised the concept of DAO LLCs for their potential in allowing greater flexibility in structuring affairs using statutory filings, legal agreements, and smart contracts.
He anticipates that the bill will make Wyoming attractive to people interested in forming a DAO by making the process easier and cheaper.
Wright founded the Ethereum-based OpenLaw as a way to simplify the creation of legal contracts.
Regulations are in flux
American CryptoFed billed itself as “the first Wyoming decentralized autonomous organization” on its website.
The project claims its “Ducat” token is a stablecoin with built-in resistance to both inflation and deflation.
Ducat derives its name from a proposed private token called the Swiss Ducat, described in Nobel Laureate F. A. Hayek’s 1976 book, Denationalization of Money.
American CryptoFed designed Locke, its other cryptocurrency, as a governance token with a supply cap of 10 trillion.
The token’s name comes from John Locke, who American CryptoFed credits with formulating the political and legal principles that inspired the American Declaration of Independence.
American CryptoFed issued the two tokens on the EOS blockchain, which it purports is capable of the desired levels of low fees, flexibility, scalability, and speed.
American CryptoFed claimed both Ducat and Locke would follow the “token” definition in SEC Commissioner Hester Peirce’s Token Safe Harbor Proposal 2.0, implying they wouldn’t fall under jurisdiction of the SEC any time soon.
However, American CryptoFed clearly didn’t convince the five Commissioners of the SEC.
Chief exec Marian Orr says that American CryptoFed sent a letter containing a detailed rebuttal of the SEC’s allegations of contradictions and incomplete information.
In a statement, she said that the SEC has not responded to requests for a written response to American CryptoFed’s rebuttal.
Regardless, others interpret the halt as a sign of the SEC’s growing scrutiny of the digital asset industry in the wake of numerous fraudulent token sales and rug pulls.
Former Justice Department associate deputy attorney general Sujit Raman said (via the Wall Street Journal):
“The SEC’s action confirms the close scrutiny that the agency continues to bring to entities in the fast-growing digital assets sector, including those that claim to employ novel corporate structures and offer novel financial products.”
SEC Chairman Gary Gensler also expressed concerns that the digital asset market would not mature without proper oversight.
He cited the SEC’s role in protecting investors against bad actors following the Treasury Department’s release of a report on stablecoins which called for Congress to set up better regulatory frameworks for the entire crypto industry.
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