The SEC is throwing a damper on ethereum madness

The Securities and Exchange Commission is taking an interest in the hottest craze in cryptocurrency, the initial coin offering (ICO), and apparently the SEC is not into the hype. The commission published a report on Tuesday advising that ICOs, or token sales, are subject to securities laws. It concluded that a certain multimillion-dollar ICO last year — the first of its kind — violated securities law.

An ICO — an acronym that intentionally mirrors “IPO” — is a new way to raise money for a startup, using the cryptocurrency Ethereum. Like Bitcoin, Ethereum runs on blockchain technology. But one of the many differences between Bitcoin and Ethereum is that the latter offers “smart contracts” — automatically executed code that can take the form of a financial transaction — that are built right into the technology. One result is that Ethereum can be a platform to raise ether (a crypto asset that can be traded for state-issued currency like dollars) in exchange for “tokens” that might offer the token holder voting rights, or a financial stake in an enterprise.

ICOs have been catching on like wildfire, with one joke ICO raising tens of thousands of dollars in minutes. In June, a messaging app raised $44 million despite not yet offering an actual app.

ICOs have been compared to crowdfunding, which is exempt from the registration requirement for securities. On Tuesday, the SEC waved aside that comparison, instead concluding that tokens — in some cases at least — were securities.

The 18-page investigative report specifically analyzes the Decentralized Autonomous Organization’s (DAO) ICO in 2016, and concludes that DAO tokens are securities. The DAO has been described as “a new sort of venture capital fund that works without the need for human administrators.” According to the SEC, the DAO violated section 5 of the Securities Act by failing to register with the Commission. The SEC has declined to pursue an enforcement action against the DAO or Slock.it (a German startup that the SEC credits with “creating” the DAO), but does not explain why in either its report or press release

Because the DAO — as described in its name — is decentralized, it’s a little unclear who the SEC would have gone after in the first place. The SEC report clarifies that its investigation looked into not only the DAO (which it calls an “unincorporated organization”), but also Slock.it, Slock.it’s co-founders, and the very nebulous category of “intermediaries.”

A security is a tradable financial asset that, in the United States, is regulated by the federal government. The SEC has determined that the tokens sold in DAO’s ICO meet the legal definition of a security, noting that “investors who purchased DAO Tokens were investing in a common enterprise and reasonably expected to earn profits through that enterprise when they sent ETH to The DAO’s Ethereum Blockchain address in exchange for DAO Tokens.” Investors were also given limited voting and ownership rights.

https://www.theverge.com/2017/7/27/16046978/sec-ethereum-cryptocurrency-dao-ico-bitcoin-blockchain