## Facts

- The SEC issued a Report of Investigation under Exchange Act § 21(a) concerning The DAO, Slock.it UG (a German company), Slock.it’s co-founders, and certain intermediaries involved with offering and trading DAO Tokens.
- The DAO was described as a decentralized autonomous organization: a virtual organization embodied in computer code and executed on the Ethereum blockchain.
- Slock.it and its co-founders created The DAO as a for-profit enterprise intended to raise capital by selling DAO Tokens and to use the pooled assets to fund business projects.
- During an offering period, The DAO sold DAO Tokens to investors in exchange for Ether (ETH), a virtual currency; investors were generally pseudonymous and identified only by blockchain addresses.
- The DAO’s materials stated that token holders would share in anticipated earnings from projects funded by The DAO, giving token purchasers an expected return tied to project performance.
- DAO Tokens provided token holders the ability to vote on whether The DAO should fund proposed projects, but proposals reached a token-holder vote only if approved for submission by The DAO’s “curators.”
- The SEC described Slock.it, its co-founders, and the curators as exercising substantial control over how the enterprise operated, including screening projects and taking actions needed to deploy investor funds.
- After the token sale and before The DAO began funding projects, an attacker exploited a flaw in The DAO’s code and diverted approximately one-third of The DAO’s assets.
- Following the exploit, Slock.it’s co-founders and others created a workaround that allowed DAO Token holders to opt to have their investment returned, which ultimately involved a hard fork of the Ethereum blockchain.
- DAO Tokens traded on a number of web-based platforms that enabled secondary trading by bringing together multiple buyers and sellers and matching orders through established, non-discretionary methods.
- The Commission stated it would not bring an enforcement action based on the conduct known at the time, and issued the report to explain how federal securities laws apply to token offerings and token trading venues.

## Issues

1. Whether DAO Tokens were “securities,” specifically “investment contracts,” under the Securities Act of 1933 and the Securities Exchange Act of 1934.
2. If DAO Tokens were securities, whether the offer and sale of DAO Tokens in the United States were subject to Securities Act registration requirements absent an exemption.
3. Whether web-based platforms supporting secondary trading in DAO Tokens met the definition of an “exchange” under the Exchange Act and Exchange Act Rule 3b-16(a), triggering registration or an exemption (such as Regulation ATS).
4. Whether token-holder voting features and use of smart contracts prevented a finding that purchasers expected profits from the managerial efforts of others under the Howey test.

## Decision

- The SEC determined that, under the facts presented, DAO Tokens were securities under the Securities Act and the Exchange Act because they were investment contracts.
- Applying the Howey test, the SEC found purchasers invested value (ETH) in a common enterprise with a reasonable expectation of profits derived from the managerial and entrepreneurial efforts of others, including Slock.it, its co-founders, and the curators.
- The SEC stated that offers and sales of securities in the United States must be registered unless an exemption applies, and that the federal securities laws can apply even when securities are issued and transferred using blockchain technology and virtual currency.
- The SEC concluded that the platforms enabling DAO Token trading met the functional criteria of an exchange (a “trading facility” under Rule 3b-16(a)) because they provided an electronic system that matched multiple buyers’ and sellers’ orders using established, non-discretionary methods.
- The SEC stated that such platforms must register as national securities exchanges or qualify for an exemption from exchange registration, including operation as an alternative trading system under Regulation ATS, as applicable.
- The Commission determined not to pursue an enforcement action in the matter based on the conduct known at the time, and issued the report to warn market participants about potential federal securities-law obligations.

## Legal Principles

- Whether a digital token is a security turns on its economic reality, not labels, technical form, or the use of distributed-ledger technology.
- A contribution of value such as virtual currency (including ETH) can satisfy Howey’s “investment of money” element.
- Token-holder voting rights do not eliminate reliance on others when a smaller, identifiable group retains substantial control over project selection, information flow, code maintenance, and other value-driving actions.
- Automation through smart contracts does not place an offering or trading activity outside the federal securities laws.
- A platform that brings together multiple buyers and sellers of securities and uses established, non-discretionary methods to match orders can be an “exchange” under Exchange Act Rule 3b-16(a), requiring exchange registration or an available exemption.

## Conclusion

In the Matter of The DAO is the SEC’s Section 21(a) report concluding that DAO Tokens were investment contracts and therefore securities, that the token sale was subject to registration requirements absent an exemption, and that online platforms matching DAO Token trades could be unregistered exchanges; the Commission closed the investigation without enforcement while warning that U.S. securities laws apply to token fundraising and token trading venues even when conducted through blockchain-based systems.


In the Matter of The DAO, Exchange Act Release No. 81207 (2017)