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(Reuters) – American CryptoFed DAO LLC, which says his mission is to create a blockchain-based monetary system “with zero inflation, zero deflation and zero transaction costs”, is a rarity among crypto collectives: it has actually sought regulation, not only by registering as a decentralized autonomous organization, or DAO, under Wyoming law but also ask for approval from the United States Securities and Exchange Commission for the tokens it planned to offer to potential members.
The reward of the DAO? Friday, the SEC announcement his second administrative process against American CryptoFed, accusing the DAO of filing a misleading registration form for a proposed public offering of its tokens under the Securities Act and of refusing to cooperate with the SEC’s investigation into the filings. ‘offer.
The crypto industry is under greater scrutiny than ever after the staggering collapse of the seemingly stable FTX exchange. The SEC’s review of the DAO filed in Wyoming, which dates back more than a year, is unrelated. But the commission seems to want to make American CryptoFed an example. The DAO attempted to withdraw the registration of the allegedly misleading offer in June, after months of fighting with the commission, in a previous administrative proceeding, regarding the DAO’s attempt to register its tokens, known as Locke and Ducat, under the Securities and Exchange Act. The SEC has allowed American CryptoFed to withdraw the Exchange Act registration, but refuse to allow the DAO to also remove the allegedly misleading public offering documents for the Locke and Ducat tokens.
That refusal, said Daniel McAvoy of Polsinelli, who was followed American CryptoFed’s tangle with the SEC indicates that the commission is trying to use the case to set a precedent for policing DAO token offerings.
American CryptoFed is not represented by counsel in its dispute with the SEC, and its CEO Marian Orr did not respond to my email query regarding the SEC’s new administrative procedure. The SEC, which announced on November 10 that it was blocking the registration of the two tokens offered by the DAO, declined to comment on the new case against American CryptoFed. (The SEC’s Enforcement Division said in a Deposit August 9 that its first administrative proceeding against the DAO, alleging a false or misleading registration statement under the Exchange Act, was prompted by the commission’s decision to accept the DAO’s withdrawal of that statement.)
CEO Orr previously told Reuters that the alleged filing shortcomings cited by the SEC stem from inherent differences between DAO tokens and traditional securities regulated by the commission. “These are attributes that the two tokens (Locke and Ducat) of a decentralized blockchain-based CryptoFed DAO monetary system will never have,” Orr said.
It is precisely the Catch-22 for DAOs, said McAvoy of Polsinelli. Federal regulators take a broad view of their authority to regulate cryptocurrencies. The SEC, as you know, has filed a plethora of lawsuits against tokens that it considers unregistered securities. The Commodity Futures Trading Commission flexed its regulatory muscles in a lawsuit to contain a DAO it accused of operating as an unregistered derivatives exchange in willful defiance of US regulatory oversight.
But according to McAvoy, existing securities laws — even those meant to protect investors — aren’t necessarily relevant to DAO token holders. Potential DAO members in a crypto collective that offer token holders no rights to share profits, for example, might not worry about seeing the DAO’s audited financials, McAvoy said, but the SEC requires such disclosures as a condition of title registration. .
By attempting to register its tokens, even though it insisted the tokens weren’t actually securities, McAvoy said, the American CryptoFed appeared to be testing a framework proposed by SEC Commissioner Hester Peirce in a speech 2020 highlighting a dilemma for crypto businesses. Crypto companies are afraid to issue tokens subject to securities laws, Peirce said, but cannot become truly decentralized blockchain networks unless their tokens are widely distributed and freely transferable. She proposed a safe harbor in which token issuers would provide robust public disclosures tailored to crypto investors’ concerns in exchange for a three-year grace period exempting tokens from registration under federal securities laws. securities.
American CryptoFed had no such leeway. Instead, the SEC has said for a year, first in the Exchange Act filing case and now in the new proceeding under the Securities Act, that DAO filings are misleading to first sight. As the commission stated in Friday’s order opening the new administrative case: “The registration statement indicates that the Ducat and Locke tokens are not securities, which is inconsistent with the statement identifying these tokens as “securities to be registered”, “argued the SEC. “It doesn’t matter if the tokens are securities, one of the statements must be false.”
DAOs are a new type of entity. Courts and regulators are still trying to figure out how to deal with them, as we saw in the controversy over the CFTC’s plan to simply serve notice of its lawsuit against the Ooki DAO. In this case, regulators repeated last weekin response to amicus arguments that the DAOs cannot be sued as a collective, that they view these entities as unincorporated associations that can be served notice of litigation by long-recognized alternative means , including a discussion forum on the website.
The new SEC proceeding against American CryptoFed, McAvoy said, adds to existing disincentives for these new entities to attempt to register their tokens. It would be folly, after the staggering fall of FTX, to claim that the crypto industry is under-regulated. But when it comes to DAO tokens that only give members a say in governance, rather than a right to share profits, the best solution, according to McAvoy, would be legislative changes that require DAOs to provide information, but not to register their tokens. as titles.
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