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      "body": "Congratulations @misato! You received a personal award!\n\n<table><tr><td>https://steemitimages.com/70x70/http://steemitboard.com/@misato/birthday2.png</td><td>Happy Birthday! - You are on the Steem blockchain for 2 years!</td></tr></table>\n\n<sub>_You can view [your badges on your Steem Board](https://steemitboard.com/@misato) and compare to others on the [Steem Ranking](https://steemitboard.com/ranking/index.php?name=misato)_</sub>\n\n\n**Do not miss the last post from @steemitboard:**\n<table><tr><td><a href=\"https://steemit.com/steemitboard/@steemitboard/use-your-witness-votes-and-get-the-community-badge\"><img src=\"https://steemitimages.com/64x128/https://cdn.steemitimages.com/DQmTugCUsoXX762vg1CuHRrpnPbfnjPogp8iCGv7F2kSVuj/image.png\"></a></td><td><a href=\"https://steemit.com/steemitboard/@steemitboard/use-your-witness-votes-and-get-the-community-badge\">Use your witness votes and get the Community Badge</a></td></tr></table>\n\n###### [Vote for @Steemitboard as a witness](https://v2.steemconnect.com/sign/account-witness-vote?witness=steemitboard&approve=1) to get one more award and increased upvotes!",
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      "body": "I. Introduction and Summary\nThe United States Securities and Exchange Commission’s (“Commission”) Division of\nEnforcement (“Division”) has investigated whether The DAO, an unincorporated organization;\nSlock.it UG (“Slock.it”), a German corporation; Slock.it’s co-founders; and intermediaries may\nhave violated the federal securities laws. The Commission has determined not to pursue an\nenforcement action in this matter based on the conduct and activities known to the Commission\nat this time.\nAs described more fully below, The DAO is one example of a Decentralized\nAutonomous Organization, which is a term used to describe a “virtual” organization embodied in\ncomputer code and executed on a distributed ledger or blockchain. The DAO was created by\nSlock.it and Slock.it’s co-founders, with the objective of operating as a for-profit entity that\nwould create and hold a corpus of assets through the sale of DAO Tokens to investors, which\nassets would then be used to fund “projects.” The holders of DAO Tokens stood to share in the\nanticipated earnings from these projects as a return on their investment in DAO Tokens. In\naddition, DAO Token holders could monetize their investments in DAO Tokens by re-selling\nDAO Tokens on a number of web-based platforms (“Platforms”) that supported secondary\ntrading in the DAO Tokens.\nAfter DAO Tokens were sold, but before The DAO was able to commence funding\nprojects, an attacker used a flaw in The DAO’s code to steal approximately one-third of The\nDAO’s assets. Slock.it’s co-founders and others responded by creating a work-around whereby\nDAO Token holders could opt to have their investment returned to them, as described in more\ndetail below.\nThe investigation raised questions regarding the application of the U.S. federal securities\nlaws to the offer and sale of DAO Tokens, including the threshold question whether DAO\nTokens are securities. Based on the investigation, and under the facts presented, the Commission\nhas determined that DAO Tokens are securities under the Securities Act of 1933 (“Securities\nAct”) and the Securities Exchange Act of 1934 (“Exchange Act”).\n1\n The Commission deems it\nappropriate and in the public interest to issue this report of investigation (“Report”) pursuant to\n 1\n This Report does not analyze the question whether The DAO was an “investment company,” as defined under\nSection 3(a) of the Investment Company Act of 1940 (“Investment Company Act”), in part, because The DAO never\ncommenced its business operations funding projects. Those who would use virtual organizations should consider\ntheir obligations under the Investment Company Act.\n2\nSection 21(a) of the Exchange Act2 to advise those who would use a Decentralized Autonomous\nOrganization (“DAO Entity”), or other distributed ledger or blockchain-enabled means for\ncapital raising, to take appropriate steps to ensure compliance with the U.S. federal securities\nlaws. All securities offered and sold in the United States must be registered with the\nCommission or must qualify for an exemption from the registration requirements. In addition,\nany entity or person engaging in the activities of an exchange must register as a national\nsecurities exchange or operate pursuant to an exemption from such registration.\nThis Report reiterates these fundamental principles of the U.S. federal securities laws and\ndescribes their applicability to a new paradigm—virtual organizations or capital raising entities\nthat use distributed ledger or blockchain technology to facilitate capital raising and/or investment\nand the related offer and sale of securities. The automation of certain functions through this\ntechnology, “smart contracts,”3 or computer code, does not remove conduct from the purview of\nthe U.S. federal securities laws.4 This Report also serves to stress the obligation to comply with\nthe registration provisions of the federal securities laws with respect to products and platforms\ninvolving emerging technologies and new investor interfaces.\nII. Facts\nA. Background\nFrom April 30, 2016 through May 28, 2016, The DAO offered and sold approximately\n1.15 billion DAO Tokens in exchange for a total of approximately 12 million Ether (“ETH”), a\n 2\n Section 21(a) of the Exchange Act authorizes the Commission to investigate violations of the federal securities\nlaws and, in its discretion, to “publish information concerning any such violations.” This Report does not constitute\nan adjudication of any fact or issue addressed herein, nor does it make any findings of violations by any individual\nor entity. The facts discussed in Section II, infra, are matters of public record or based on documentary records. We\nare publishing this Report on the Commission’s website to ensure that all market participants have concurrent and\nequal access to the information contained herein.\n3 Computer scientist Nick Szabo described a “smart contract” as:\na computerized transaction protocol that executes terms of a contract. The general objectives of\nsmart contract design are to satisfy common contractual conditions (such as payment terms, liens,\nconfidentiality, and even enforcement), minimize exceptions both malicious and accidental, and\nminimize the need for trusted intermediaries. Related economic goals include lowering fraud loss,\narbitrations and enforcement costs, and other transaction costs.\nSee Nick Szabo, Smart Contracts, 1994, http://www.virtualschool.edu/mon/Economics/SmartContracts.html.\n4 See SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 351 (1943) (“[T]he reach of the [Securities] Act does not\nstop with the obvious and commonplace. Novel, uncommon, or irregular devices, whatever they appear to be, are\nalso reached if it be proved as matter of fact that they were widely offered or dealt in under terms or courses of\ndealing which established their character in commerce as ‘investment contracts,’ or as ‘any interest or instrument\ncommonly known as a ‘security’.”); see also Reves v. Ernst & Young, 494 U.S. 56, 61 (1990) (“Congress’ purpose\nin enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name\nthey are called.”).\n3\nvirtual currency5 used on the Ethereum Blockchain.6\n As of the time the offering closed, the total\nETH raised by The DAO was valued in U.S. Dollars (“USD”) at approximately $150 million.\nThe concept of a DAO Entity is memorialized in a document (the “White Paper”),\nauthored by Christoph Jentzsch, the Chief Technology Officer of Slock.it, a “Blockchain and IoT\n[(internet-of-things)] solution company,” incorporated in Germany and co-founded by Christoph\nJentzsch, Simon Jentzsch (Christoph Jentzsch’s brother), and Stephan Tual (“Tual”).\n7\n The\nWhite Paper purports to describe “the first implementation of a [DAO Entity] code to automate\norganizational governance and decision making.”8\n The White Paper posits that a DAO Entity\n“can be used by individuals working together collaboratively outside of a traditional corporate\nform. It can also be used by a registered corporate entity to automate formal governance rules\ncontained in corporate bylaws or imposed by law.” The White Paper proposes an entity—a\nDAO Entity—that would use smart contracts to attempt to solve governance issues it described\nas inherent in traditional corporations.9\n As described, a DAO Entity purportedly would supplant\ntraditional mechanisms of corporate governance and management with a blockchain such that\ncontractual terms are “formalized, automated and enforced using software.”10\n 5\n The Financial Action Task Force defines “virtual currency” as:\na digital representation of value that can be digitally traded and functions as: (1) a medium of\nexchange; and/or (2) a unit of account; and/or (3) a store of value, but does not have legal tender\nstatus (i.e., when tendered to a creditor, is a valid and legal offer of payment) in any jurisdiction.\nIt is not issued or guaranteed by any jurisdiction, and fulfils the above functions only by\nagreement within the community of users of the virtual currency. Virtual currency is distinguished\nfrom fiat currency (a.k.a. “real currency,” “real money,” or “national currency”), which is the coin\nand paper money of a country that is designated as its legal tender; circulates; and is customarily\nused and accepted as a medium of exchange in the issuing country. It is distinct from e-money,\nwhich is a digital representation of fiat currency used to electronically transfer value denominated\nin fiat currency.\nFATF Report, Virtual Currencies, Key Definitions and Potential AML/CFT Risks, FINANCIAL ACTION TASK FORCE\n(June 2014), http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potentialaml-cft-risks.pdf.\n6\n Ethereum, developed by the Ethereum Foundation, a Swiss nonprofit organization, is a decentralized platform that\nruns smart contracts on a blockchain known as the Ethereum Blockchain.\n7\n Christoph Jentzsch released the final draft of the White Paper on or around March 23, 2016. He introduced his\nconcept of a DAO Entity as early as November 2015 at an Ethereum Developer Conference in London, as a medium\nto raise funds for Slock.it, a German start-up he co-founded in September 2015. Slock.it purports to create\ntechnology that embeds smart contracts that run on the Ethereum Blockchain into real-world devices and, as a result,\nfor example, permits anyone to rent, sell or share physical objects in a decentralized way. See SLOCK.IT,\nhttps://slock.it/.\n8\n Christoph Jentzsch, Decentralized Autonomous Organization to Automate Governance Final Draft – Under\nReview, https://download.slock.it/public/DAO/WhitePaper.pdf.\n9\n Id.\n10 Id. The White Paper contained the following statement:\nA word of caution, at the outset: the legal status of [DAO Entities] remains the subject of active\nand vigorous debate and discussion. Not everyone shares the same definition. Some have said\nthat [DAO Entities] are autonomous code and can operate independently of legal systems; others \n\nThe DAO\n“The DAO” is the “first generation” implementation of the White Paper concept of a\nDAO Entity, and it began as an effort to create a “crowdfunding contract” to raise “funds to grow\n[a] company in the crypto space.”11 In November 2015, at an Ethereum Developer Conference\nin London, Christoph Jentzsch described his proposal for The DAO as a “for-profit DAO\n[Entity],” where participants would send ETH (a virtual currency) to The DAO to purchase DAO\nTokens, which would permit the participant to vote and entitle the participant to “rewards.”12\nChristoph Jentzsch likened this to “buying shares in a company and getting … dividends.”13 The\nDAO was to be “decentralized” in that it would allow for voting by investors holding DAO\nTokens.\n14 All funds raised were to be held at an Ethereum Blockchain “address” associated with\nThe DAO and DAO Token holders were to vote on contract proposals, including proposals to\nThe DAO to fund projects and distribute The DAO’s anticipated earnings from the projects it\nfunded.\n15 The DAO was intended to be “autonomous” in that project proposals were in the form\nof smart contracts that exist on the Ethereum Blockchain and the votes were administered by the\ncode of The DAO.\n16\n\nhave said that [DAO Entities] must be owned or operate[d] by humans or human created entities.\nThere will be many use cases, and the DAO [Entity] code will develop over time. Ultimately,\nhow a DAO [Entity] functions and its legal status will depend on many factors, including how\nDAO [Entity] code is used, where it is used, and who uses it. This paper does not speculate about\nthe legal status of [DAO Entities] worldwide. This paper is not intended to offer legal advice or\nconclusions. Anyone who uses DAO [Entity] code will do so at their own risk.\nId.\n11 Christoph Jentzsch, The History of the DAO and Lessons Learned, SLOCK.IT BLOG (Aug. 24, 2016),\nhttps://blog.slock.it/the-history-of-the-dao-and-lessons-learned-d06740f8cfa5#.5o62zo8uv. Although The DAO has\nbeen described as a “crowdfunding contract,” The DAO would not have met the requirements of Regulation\nCrowdfunding, adopted under Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012 (providing an\nexemption from registration for certain crowdfunding), because, among other things, it was not a broker-dealer or a\nfunding portal registered with the SEC and the Financial Industry Regulatory Authority (“FINRA”). See Regulation\nCrowdfunding: A Small Entity Compliance Guide for Issuers, SEC (Apr. 5, 2017),\nhttps://www.sec.gov/info/smallbus/secg/rccomplianceguide-051316.htm; Updated Investor Bulletin: Crowdfunding\nfor Investors, SEC (May 10, 2017), https://www.sec.gov/oiea/investor-alerts-bulletins/ib_crowdfunding-.html.\n12 See Slockit, Slock.it DAO demo at Devcon1: IoT + Blockchain, YOUTUBE (Nov. 13, 2015),\nhttps://www.youtube.com/watch?v=49wHQoJxYPo.\n13 Id.\n14 See Jentzsch, supra note 8.\n15 Id. In theory, there was no limitation on the type of project that could be proposed. For example, proposed\n“projects” could include, among other things, projects that would culminate in the creation of products or services\nthat DAO Token holders could use or charge others for using.\n16 Id.\n5\nOn or about April 29, 2016, Slock.it deployed The DAO code on the Ethereum\nBlockchain, as a set of pre-programmed instructions.\n17 This code was to govern how The DAO\nwas to operate.\nTo promote The DAO, Slock.it’s co-founders launched a website (“The DAO Website”).\nThe DAO Website included a description of The DAO’s intended purpose: “To blaze a new path\nin business for the betterment of its members, existing simultaneously nowhere and everywhere\nand operating solely with the steadfast iron will of unstoppable code.”18 The DAO Website also\ndescribed how The DAO operated, and included a link through which DAO Tokens could be\npurchased. The DAO Website also included a link to the White Paper, which provided detailed\ninformation about a DAO Entity’s structure and its source code and, together with The DAO\nWebsite, served as the primary source of promotional materials for The DAO. On The DAO\nWebsite and elsewhere, Slock.it represented that The DAO’s source code had been reviewed by\n“one of the world’s leading security audit companies” and “no stone was left unturned during\nthose five whole days of security analysis.”19\nSlock.it’s co-founders also promoted The DAO by soliciting media attention and by\nposting almost daily updates on The DAO’s status on The DAO and Slock.it websites and\nnumerous online forums relating to blockchain technology. Slock.it’s co-founders used these\nposts to communicate to the public information about how to participate in The DAO, including:\nhow to create and acquire DAO Tokens; the framework for submitting proposals for projects;\nand how to vote on proposals. Slock.it also created an online forum on The DAO Website, as\nwell as administered “The DAO Slack” channel, an online messaging platform in which over\n5,000 invited “team members” could discuss and exchange ideas about The DAO in real time.\n1. DAO Tokens\nIn exchange for ETH, The DAO created DAO Tokens (proportional to the amount of\nETH paid) that were then assigned to the Ethereum Blockchain address of the person or entity\nremitting the ETH. A DAO Token granted the DAO Token holder certain voting and ownership\nrights. According to promotional materials, The DAO would earn profits by funding projects\n 17 According to the White Paper, a DAO Entity is “activated by deployment on the Ethereum [B]lockchain. Once\ndeployed, a [DAO Entity’s] code requires ‘ether’ [ETH] to engage in transactions on Ethereum. Ether is the digital\nfuel that powers the Ethereum Network.” The only way to update or alter The DAO’s code is to submit a new\nproposal for voting and achieve a majority consensus on that proposal. See Jentzsch, supra note 8. According to\nSlock.it’s website, Slock.it gave The DAO code to the Ethereum community, noting that:\nThe DAO framework is [a] side project of Slock.it UG and a gift to the Ethereum community. It\nconsisted of a definitive whitepaper, smart contract code audited by one of the best security\ncompanies in the world and soon, a complete frontend interface. All free and open source for\nanyone to re-use, it is our way to say ‘thank you’ to the community.\nSLOCK.IT, https://slock.it. The DAO code is publicly-available on GitHub, a host of source code. See The Standard\nDAO Framework, Inc., Whitepaper, GITHUB, https://github.com/slockit/DAO.\n18 The DAO Website was available at https://daohub.org.\n19 Stephen Tual, Deja Vu DAO Smart Contracts Audit Results, SLOCK.IT BLOG (Apr. 5, 2016),\nhttps://blog.slock.it/deja-vu-dai-smart-contracts-audit-results-d26bc088e32e.\n6\nthat would provide DAO Token holders a return on investment. The various promotional\nmaterials disseminated by Slock.it’s co-founders touted that DAO Token holders would receive\n“rewards,” which the White Paper defined as, “any [ETH] received by a DAO [Entity] generated\nfrom projects the DAO [Entity] funded.” DAO Token holders would then vote to either use the\nrewards to fund new projects or to distribute the ETH to DAO Token holders.\nFrom April 30, 2016 through May 28, 2016 (the “Offering Period”), The DAO offered\nand sold DAO Tokens. Investments in The DAO were made “pseudonymously” (i.e., an\nindividual’s or entity’s pseudonym was their Ethereum Blockchain address). To purchase a\nDAO Token offered for sale by The DAO, an individual or entity sent ETH from their Ethereum\nBlockchain address to an Ethereum Blockchain address associated with The DAO. All of the\nETH raised in the offering as well as any future profits earned by The DAO were to be pooled\nand held in The DAO’s Ethereum Blockchain address. The token price fluctuated in a range of\napproximately 1 to 1.5 ETH per 100 DAO Tokens, depending on when the tokens were\npurchased during the Offering Period. Anyone was eligible to purchase DAO Tokens (as long as\nthey paid ETH). There were no limitations placed on the number of DAO Tokens offered for\nsale, the number of purchasers of DAO Tokens, or the level of sophistication of such purchasers.\nDAO Token holders were not restricted from re-selling DAO Tokens acquired in the\noffering, and DAO Token holders could sell their DAO Tokens in a variety of ways in the\nsecondary market and thereby monetize their investment as discussed below. Prior to the\nOffering Period, Slock.it solicited at least one U.S. web-based platform to trade DAO Tokens on\nits system and, at the time of the offering, The DAO Website and other promotional materials\ndisseminated by Slock.it included representations that DAO Tokens would be available for\nsecondary market trading after the Offering Period via several platforms. During the Offering\nPeriod and afterwards, the Platforms posted notices on their own websites and on social media\nthat each planned to support secondary market trading of DAO Tokens.20\nIn addition to secondary market trading on the Platforms, after the Offering Period, DAO\nTokens were to be freely transferable on the Ethereum Blockchain. DAO Token holders would\nalso be permitted to redeem their DAO Tokens for ETH through a complicated, multi-week\n(approximately 46-day) process referred to as a DAO Entity “split.”21\n2. Participants in The DAO\nAccording to the White Paper, in order for a project to be considered for funding with “a\nDAO [Entity]’s [ETH],” a “Contractor” first must submit a proposal to the DAO Entity.\nSpecifically, DAO Token holders expected Contractors to submit proposals for projects that\ncould provide DAO Token holders returns on their investments. Submitting a proposal to The\nDAO involved: (1) writing a smart contract, and then deploying and publishing it on the\n 20 The Platforms are registered with FinCEN as “Money Services Businesses” and provide systems whereby\ncustomers may exchange virtual currencies for other virtual currencies or fiat currencies.\n21 According to the White Paper, the primary purpose of a split is to protect minority shareholders and prevent what\nis commonly referred to as a “51% Attack,” whereby an attacker holding 51% of a DAO Entity’s Tokens could\ncreate a proposal to send all of the DAO Entity’s funds to himself or herself.\n7\nEthereum Blockchain; and (2) posting details about the proposal on The DAO Website,\nincluding the Ethereum Blockchain address of the deployed contract and a link to its source\ncode. Proposals could be viewed on The DAO Website as well as other publicly-accessible\nwebsites. Per the White Paper, there were two prerequisites for submitting a proposal. An\nindividual or entity must: (1) own at least one DAO Token; and (2) pay a deposit in the form of\nETH that would be forfeited to the DAO Entity if the proposal was put up for a vote and failed to\nachieve a quorum of DAO Token holders. It was publicized that Slock.it would be the first to\nsubmit a proposal for funding.22\nETH raised by The DAO was to be distributed to a Contractor to fund a proposal only on\na majority vote of DAO Token holders.23 DAO Token holders were to cast votes, which would\nbe weighted by the number of tokens they controlled, for or against the funding of a specific\nproposal. The voting process, however, was publicly criticized in that it could incentivize\ndistorted voting behavior and, as a result, would not accurately reflect the consensus of the\nmajority of DAO Token holders. Specifically, as noted in a May 27, 2016 blog post by a group\nof computer security researchers, The DAO’s structure included a “strong positive bias to vote\nYES on proposals and to suppress NO votes as a side effect of the way in which it restricts users’\nrange of options following the casting of a vote.”24\nBefore any proposal was put to a vote by DAO Token holders, it was required to be\nreviewed by one or more of The DAO’s “Curators.” At the time of the formation of The DAO,\nthe Curators were a group of individuals chosen by Slock.it.25 According to the White Paper, the\nCurators of a DAO Entity had “considerable power.” The Curators performed crucial security\nfunctions and maintained ultimate control over which proposals could be submitted to, voted on,\nand funded by The DAO. As stated on The DAO Website during the Offering Period, The DAO\nrelied on its Curators for “failsafe protection” and for protecting The DAO from “malicous [sic]\nactors.” Specifically, per The DAO Website, a Curator was responsible for: (1) confirming that\nany proposal for funding originated from an identifiable person or organization; and (2)\n 22 It was stated on The DAO Website and elsewhere that Slock.it anticipated that it would be the first to submit a\nproposal for funding. In fact, a draft of Slock.it’s proposal for funding for an “Ethereum Computer and Universal\nSharing Network” was publicly-available online during the Offering Period.\n23 DAO Token holders could vote on proposals, either by direct interaction with the Ethereum Blockchain or by\nusing an application that interfaces with the Ethereum Blockchain. It was generally acknowledged that DAO Token\nholders needed some technical knowledge in order to submit a vote, and The DAO Website included a link to a stepby-step\ntutorial describing how to vote on proposals.\n24 By voting on a proposal, DAO Token holders would “tie up” their tokens until the end of the voting cycle. See\nJentzsch, supra note 8 at 8 (“The tokens used to vote will be blocked, meaning they can not [sic] be transferred until\nthe proposal is closed.”). If, however, a DAO Token holder abstained from voting, the DAO Token holder could\navoid these restrictions; any DAO Tokens not submitted for a vote could be withdrawn or transferred at any time.\nAs a result, DAO Token holders were incentivized either to vote yes or to abstain from voting. See Dino Mark et al.,\nA Call for a Temporary Moratorium on The DAO, HACKING, DISTRIBUTED (May 27, 2016, 1:35 PM),\nhttp://hackingdistributed.com/2016/05/27/dao-call-for-moratorium/.\n25 At the time of The DAO’s launch, The DAO Website identified eleven “high profile” individuals as holders of\nThe DAO’s Curator “Multisig” (or “private key”). These individuals all appear to live outside of the United States.\nMany of them were associated with the Ethereum Foundation, and The DAO Website touted the qualifications and\ntrustworthiness of these individuals.\n8\nconfirming that smart contracts associated with any such proposal properly reflected the code the\nContractor claims to have deployed on the Ethereum Blockchain. If a Curator determined that\nthe proposal met these criteria, the Curator could add the proposal to the “whitelist,” which was a\nlist of Ethereum Blockchain addresses that could receive ETH from The DAO if the majority of\nDAO Token holders voted for the proposal.\nCurators of The DAO had ultimate discretion as to whether or not to submit a proposal\nfor voting by DAO Token holders. Curators also determined the order and frequency of\nproposals, and could impose subjective criteria for whether the proposal should be whitelisted.\nOne member of the group chosen by Slock.it to serve collectively as the Curator stated publicly\nthat the Curator had “complete control over the whitelist … the order in which things get\nwhitelisted, the duration for which [proposals] get whitelisted, when things get unwhitelisted …\n[and] clear ability to control the order and frequency of proposals,” noting that “curators have\ntremendous power.”26 Another Curator publicly announced his subjective criteria for\ndetermining whether to whitelist a proposal, which included his personal ethics.27 Per the White\nPaper, a Curator also had the power to reduce the voting quorum requirement by 50% every\nother week. Absent action by a Curator, the quorum could be reduced by 50% only if no\nproposal had reached the required quorum for 52 weeks.\n3. Secondary Market Trading on the Platforms\nDuring the period from May 28, 2016 through early September 2016, the Platforms\nbecame the preferred vehicle for DAO Token holders to buy and sell DAO Tokens in the\nsecondary market using virtual or fiat currencies. Specifically, the Platforms used electronic\nsystems that allowed their respective customers to post orders for DAO Tokens on an\nanonymous basis. For example, customers of each Platform could buy or sell DAO Tokens by\nentering a market order on the Platform’s system, which would then match with orders from\nother customers residing on the system. Each Platform’s system would automatically execute\nthese orders based on pre-programmed order interaction protocols established by the Platform.\nNone of the Platforms received orders for DAO Tokens from non-Platform customers or\nrouted its respective customers’ orders to any other trading destinations. The Platforms publicly\ndisplayed all their quotes, trades, and daily trading volume in DAO Tokens on their respective\nwebsites. During the period from May 28, 2016 through September 6, 2016, one such Platform\nexecuted more than 557,378 buy and sell transactions in DAO Tokens by more than 15,000 of its\nU.S. and foreign customers. During the period from May 28, 2016 through August 1, 2016,\nanother such Platform executed more than 22,207 buy and sell transactions in DAO Tokens by\nmore than 700 of its U.S. customers.\n 26 Epicenter, EB134 – Emin Gün Sirer And Vlad Zamfir: On A Rocky DAO, YOUTUBE (June 6, 2016),\nhttps://www.youtube.com/watch?v=ON5GhIQdFU8.\n27 Andrew Quentson, Are the DAO Curators Masters or Janitors?, THE COIN TELEGRAPH (June 12, 2016),\nhttps://cointelegraph.com/news/are-the-dao-curators-masters-or-janitors.\n9\n4. Security Concerns, The “Attack” on The DAO, and The Hard Fork\nIn late May 2016, just prior to the expiration of the Offering Period, concerns about the\nsafety and security of The DAO’s funds began to surface due to vulnerabilities in The DAO’s\ncode. On May 26, 2016, in response to these concerns, Slock.it submitted a “DAO Security\nProposal” that called for the development of certain updates to The DAO’s code and the\nappointment of a security expert.28 Further, on June 3, 2016, Christoph Jentzsch, on behalf of\nSlock.it, proposed a moratorium on all proposals until alterations to The DAO’s code to fix\nvulnerabilities in The DAO’s code had been implemented.29\nOn June 17, 2016, an unknown individual or group (the “Attacker”) began rapidly\ndiverting ETH from The DAO, causing approximately 3.6 million ETH—1/3 of the total ETH\nraised by The DAO offering—to move from The DAO’s Ethereum Blockchain address to an\nEthereum Blockchain address controlled by the Attacker (the “Attack”).\n30 Although the diverted\nETH was then held in an address controlled by the Attacker, the Attacker was prevented by The\nDAO’s code from moving the ETH from that address for 27 days.\n31\nIn order to secure the diverted ETH and return it to DAO Token holders, Slock.it’s cofounders\nand others endorsed a “Hard Fork” to the Ethereum Blockchain. The “Hard Fork,”\ncalled for a change in the Ethereum protocol on a going forward basis that would restore the\nDAO Token holders’ investments as if the Attack had not occurred. On July 20, 2016, after a\nmajority of the Ethereum network adopted the necessary software updates, the new, forked\nEthereum Blockchain became active.32 The Hard Fork had the effect of transferring all of the\nfunds raised (including those held by the Attacker) from The DAO to a recovery address, where\nDAO Token holders could exchange their DAO Tokens for ETH.33 All DAO Token holders\n 28 See Stephan Tual, Proposal #1-DAO Security, Redux, SLOCK.IT BLOG (May 26, 2016), https://blog.slock.it/bothour-proposals-are-now-out-voting-starts-saturday-morning-ba322d6d3aea.\nThe unnamed security expert would “act\nas the first point of contact for security disclosures, and continually monitor, pre-empt and avert any potential attack\nvectors The DAO may face, including social, technical and economic attacks.” Id. Slock.it initially proposed a\nmuch broader security proposal that included the formation of a “DAO Security” group, the establishment of a “Bug\nBounty Program,” and routine external audits of The DAO’s code. However, the cost of the proposal (125,000\nETH), which would be paid from The DAO’s funds, was immediately criticized as too high and Slock.it decided\ninstead to submit the revised proposal described above. See Stephan Tual, DAO.Security, a Proposal to guarantee\nthe integrity of The DAO, SLOCK.IT BLOG (May 25, 2016), https://blog.slock.it/dao-security-a-proposal-toguarantee-the-integrity-of-the-dao-3473899ace9d.\n29 See TheDAO Proposal_ID 5, ETHERSCAN, https://etherscan.io/token/thedao-proposal/5.\n30 See Stephan Tual, DAO Security Advisory: live updates, SLOCK.IT BLOG (June 17, 2016), https://blog.slock.it/daosecurity-advisory-live-updates-2a0a42a2d07b.\n31 Id.\n32 A minority group, however, elected not to adopt the new Ethereum Blockchain created by the Hard Fork because\nto do so would run counter to the concept that a blockchain is immutable. Instead they continued to use the former\nversion of the blockchain, which is now known as “Ethereum Classic.”\n33 See Christoph Jentzsch, What the ‘Fork’ Really Means, SLOCK.IT BLOG (July 18, 2016), https://blog.slock.it/whatthe-fork-really-means-6fe573ac31dd.\n10\nwho adopted the Hard Fork could exchange their DAO Tokens for ETH, and avoid any loss of\nthe ETH they had invested.\n\nDiscussion\nThe Commission is aware that virtual organizations and associated individuals and\nentities increasingly are using distributed ledger technology to offer and sell instruments such as\nDAO Tokens to raise capital. These offers and sales have been referred to, among other things,\nas “Initial Coin Offerings” or “Token Sales.” Accordingly, the Commission deems it\nappropriate and in the public interest to issue this Report in order to stress that the U.S. federal\nsecurities law may apply to various activities, including distributed ledger technology, depending\non the particular facts and circumstances, without regard to the form of the organization or\ntechnology used to effectuate a particular offer or sale. In this Report, the Commission considers\nthe particular facts and circumstances of the offer and sale of DAO Tokens to demonstrate the\napplication of existing U.S. federal securities laws to this new paradigm.\nA. Section 5 of the Securities Act\nThe registration provisions of the Securities Act contemplate that the offer or sale of\nsecurities to the public must be accompanied by the “full and fair disclosure” afforded by\nregistration with the Commission and delivery of a statutory prospectus containing information\nnecessary to enable prospective purchasers to make an informed investment decision.\nRegistration entails disclosure of detailed “information about the issuer’s financial condition, the\nidentity and background of management, and the price and amount of securities to be offered …\n.” SEC v. Cavanagh, 1 F. Supp. 2d 337, 360 (S.D.N.Y. 1998), aff’d, 155 F.3d 129 (2d Cir.\n1998). “The registration statement is designed to assure public access to material facts bearing\non the value of publicly traded securities and is central to the Act’s comprehensive scheme for\nprotecting public investors.” SEC v. Aaron, 605 F.2d 612, 618 (2d Cir. 1979) (citing SEC v.\nRalston Purina Co., 346 U.S. 119, 124 (1953)), vacated on other grounds, 446 U.S. 680 (1980).\nSection 5(a) of the Securities Act provides that, unless a registration statement is in effect as to a\nsecurity, it is unlawful for any person, directly or indirectly, to engage in the offer or sale of\nsecurities in interstate commerce. Section 5(c) of the Securities Act provides a similar\nprohibition against offers to sell, or offers to buy, unless a registration statement has been filed.\nThus, both Sections 5(a) and 5(c) of the Securities Act prohibit the unregistered offer or sale of\nsecurities in interstate commerce. 15 U.S.C. § 77e(a) and (c). Violations of Section 5 do not\nrequire scienter. SEC v. Universal Major Indus. Corp., 546 F.2d 1044, 1047 (2d Cir. 1976).\n 34 Id.\n11\nB. DAO Tokens Are Securities\n1. Foundational Principles of the Securities Laws Apply to Virtual\nOrganizations or Capital Raising Entities Making Use of Distributed\nLedger Technology\nUnder Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act, a\nsecurity includes “an investment contract.” See 15 U.S.C. §§ 77b-77c. An investment contract\nis an investment of money in a common enterprise with a reasonable expectation of profits to be\nderived from the entrepreneurial or managerial efforts of others. See SEC v. Edwards, 540 U.S.\n389, 393 (2004); SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946); see also United Housing\nFound., Inc. v. Forman, 421 U.S. 837, 852-53 (1975) (The “touchstone” of an investment\ncontract “is the presence of an investment in a common venture premised on a reasonable\nexpectation of profits to be derived from the entrepreneurial or managerial efforts of others.”).\nThis definition embodies a “flexible rather than a static principle, one that is capable of\nadaptation to meet the countless and variable schemes devised by those who seek the use of the\nmoney of others on the promise of profits.” Howey, 328 U.S. at 299 (emphasis added). The test\n“permits the fulfillment of the statutory purpose of compelling full and fair disclosure relative to\nthe issuance of ‘the many types of instruments that in our commercial world fall within the\nordinary concept of a security.’” Id. In analyzing whether something is a security, “form should\nbe disregarded for substance,” Tcherepnin v. Knight, 389 U.S. 332, 336 (1967), “and the\nemphasis should be on economic realities underlying a transaction, and not on the name\nappended thereto.” United Housing Found., 421 U.S. at 849.\n2. Investors in The DAO Invested Money\nIn determining whether an investment contract exists, the investment of “money” need\nnot take the form of cash. See, e.g., Uselton v. Comm. Lovelace Motor Freight, Inc., 940 F.2d\n564, 574 (10th Cir. 1991) (“[I]n spite of Howey’s reference to an ‘investment of money,’ it is\nwell established that cash is not the only form of contribution or investment that will create an\ninvestment contract.”).\nInvestors in The DAO used ETH to make their investments, and DAO Tokens were\nreceived in exchange for ETH. Such investment is the type of contribution of value that can\ncreate an investment contract under Howey. See SEC v. Shavers, No. 4:13-CV-416, 2014 WL\n4652121, at *1 (E.D. Tex. Sept. 18, 2014) (holding that an investment of Bitcoin, a virtual\ncurrency, meets the first prong of Howey); Uselton, 940 F.2d at 574 (“[T]he ‘investment’ may\ntake the form of ‘goods and services,’ or some other ‘exchange of value’.”) (citations omitted).\n3. With a Reasonable Expectation of Profits\nInvestors who purchased DAO Tokens were investing in a common enterprise and\nreasonably expected to earn profits through that enterprise when they sent ETH to The DAO’s\nEthereum Blockchain address in exchange for DAO Tokens. “[P]rofits” include “dividends,\nother periodic payments, or the increased value of the investment.” Edwards, 540 U.S. at 394.\nAs described above, the various promotional materials disseminated by Slock.it and its cofounders\ninformed investors that The DAO was a for-profit entity whose objective was to fund \n12\nprojects in exchange for a return on investment.\n35 The ETH was pooled and available to The\nDAO to fund projects. The projects (or “contracts”) would be proposed by Contractors. If the\nproposed contracts were whitelisted by Curators, DAO Token holders could vote on whether The\nDAO should fund the proposed contracts. Depending on the terms of each particular contract,\nDAO Token holders stood to share in potential profits from the contracts. Thus, a reasonable\ninvestor would have been motivated, at least in part, by the prospect of profits on their\ninvestment of ETH in The DAO.\n4. Derived from the Managerial Efforts of Others\na. The Efforts of Slock.it, Slock.it’s Co-Founders, and The DAO’s\nCurators Were Essential to the Enterprise\nInvestors’ profits were to be derived from the managerial efforts of others—specifically,\nSlock.it and its co-founders, and The DAO’s Curators. The central issue is “whether the efforts\nmade by those other than the investor are the undeniably significant ones, those essential\nmanagerial efforts which affect the failure or success of the enterprise.” SEC v. Glenn W. Turner\nEnters., Inc., 474 F.2d 476, 482 (9th Cir. 1973). The DAO’s investors relied on the managerial\nand entrepreneurial efforts of Slock.it and its co-founders, and The DAO’s Curators, to manage\nThe DAO and put forth project proposals that could generate profits for The DAO’s investors.\nInvestors’ expectations were primed by the marketing of The DAO and active\nengagement between Slock.it and its co-founders with The DAO and DAO Token holders. To\nmarket The DAO and DAO Tokens, Slock.it created The DAO Website on which it published\nthe White Paper explaining how a DAO Entity would work and describing their vision for a\nDAO Entity. Slock.it also created and maintained other online forums that it used to provide\ninformation to DAO Token holders about how to vote and perform other tasks related to their\ninvestment. Slock.it appears to have closely monitored these forums, answering questions from\nDAO Token holders about a variety of topics, including the future of The DAO, security\nconcerns, ground rules for how The DAO would work, and the anticipated role of DAO Token\nholders. The creators of The DAO held themselves out to investors as experts in Ethereum, the\nblockchain protocol on which The DAO operated, and told investors that they had selected\npersons to serve as Curators based on their expertise and credentials. Additionally, Slock.it told\ninvestors that it expected to put forth the first substantive profit-making contract proposal—a\nblockchain venture in its area of expertise. Through their conduct and marketing materials,\nSlock.it and its co-founders led investors to believe that they could be relied on to provide the\nsignificant managerial efforts required to make The DAO a success.\nInvestors in The DAO reasonably expected Slock.it and its co-founders, and The DAO’s\nCurators, to provide significant managerial efforts after The DAO’s launch. The expertise of\nThe DAO’s creators and Curators was critical in monitoring the operation of The DAO,\nsafeguarding investor funds, and determining whether proposed contracts should be put for a\n 35 That the “projects” could encompass services and the creation of goods for use by DAO Token holders does not\nchange the core analysis that investors purchased DAO Tokens with the expectation of earning profits from the\nefforts of others.\n13\nvote. Investors had little choice but to rely on their expertise. At the time of the offering, The\nDAO’s protocols had already been pre-determined by Slock.it and its co-founders, including the\ncontrol that could be exercised by the Curators. Slock.it and its co-founders chose the Curators,\nwhose function it was to: (1) vet Contractors; (2) determine whether and when to submit\nproposals for votes; (3) determine the order and frequency of proposals that were submitted for a\nvote; and (4) determine whether to halve the default quorum necessary for a successful vote on\ncertain proposals. Thus, the Curators exercised significant control over the order and frequency\nof proposals, and could impose their own subjective criteria for whether the proposal should be\nwhitelisted for a vote by DAO Token holders. DAO Token holders’ votes were limited to\nproposals whitelisted by the Curators, and, although any DAO Token holder could put forth a\nproposal, each proposal would follow the same protocol, which included vetting and control by\nthe current Curators. While DAO Token holders could put forth proposals to replace a Curator,\nsuch proposals were subject to control by the current Curators, including whitelisting and\napproval of the new address to which the tokens would be directed for such a proposal. In\nessence, Curators had the power to determine whether a proposal to remove a Curator was put to\na vote.\n36\nAnd, Slock.it and its co-founders did, in fact, actively oversee The DAO. They\nmonitored The DAO closely and addressed issues as they arose, proposing a moratorium on all\nproposals until vulnerabilities in The DAO’s code had been addressed and a security expert to\nmonitor potential attacks on The DAO had been appointed. When the Attacker exploited a\nweakness in the code and removed investor funds, Slock.it and its co-founders stepped in to help\nresolve the situation.\nb. DAO Token Holders’ Voting Rights Were Limited\nAlthough DAO Token holders were afforded voting rights, these voting rights were\nlimited. DAO Token holders were substantially reliant on the managerial efforts of Slock.it, its\nco-founders, and the Curators.\n37 Even if an investor’s efforts help to make an enterprise\nprofitable, those efforts do not necessarily equate with a promoter’s significant managerial\nefforts or control over the enterprise. See, e.g., Glenn W. Turner, 474 F.2d at 482 (finding that a\nmulti-level marketing scheme was an investment contract and that investors relied on the\npromoter’s managerial efforts, despite the fact that investors put forth the majority of the labor\nthat made the enterprise profitable, because the promoter dictated the terms and controlled the\nscheme itself); Long v. Shultz, 881 F.2d 129, 137 (5th Cir. 1989) (“An investor may authorize the\nassumption of particular risks that would create the possibility of greater profits or losses but still\ndepend on a third party for all of the essential managerial efforts without which the risk could not\n 36 DAO Token holders could put forth a proposal to split from The DAO, which would result in the creation of a\nnew DAO Entity with a new Curator. Other DAO Token holders would be allowed to join the new DAO Entity as\nlong as they voted yes to the original “split” proposal. Unlike all other contract proposals, a proposal to split did not\nrequire a deposit or a quorum, and it required a seven-day debating period instead of the minimum two-week\ndebating period required for other proposals.\n37 Because, as described above, DAO Token holders were incentivized either to vote yes or to abstain from voting,\nthe results of DAO Token holder voting would not necessarily reflect the actual view of a majority of DAO Token\nholders.\n14\npay off.”). See also generally SEC v. Merchant Capital, LLC, 483 F.3d 747 (11th Cir. 2007)\n(finding an investment contract even where voting rights were provided to purported general\npartners, noting that the voting process provided limited information for investors to make\ninformed decisions, and the purported general partners lacked control over the information in the\nballots).\nThe voting rights afforded DAO Token holders did not provide them with meaningful\ncontrol over the enterprise, because (1) DAO Token holders’ ability to vote for contracts was a\nlargely perfunctory one; and (2) DAO Token holders were widely dispersed and limited in their\nability to communicate with one another.\nFirst, as discussed above, DAO Token holders could only vote on proposals that had been\ncleared by the Curators.38 And that clearance process did not include any mechanism to provide\nDAO Token holders with sufficient information to permit them to make informed voting\ndecisions. Indeed, based on the particular facts concerning The DAO and the few draft proposals\ndiscussed in online forums, there are indications that contract proposals would not have\nnecessarily provide enough information for investors to make an informed voting decision,\naffording them less meaningful control. For example, the sample contract proposal attached to\nthe White Paper included little information concerning the terms of the contract. Also, the\nSlock.it co-founders put forth a draft of their own contract proposal and, in response to questions\nand requests to negotiate the terms of the proposal (posted to a DAO forum), a Slock.it founder\nexplained that the proposal was intentionally vague and that it was, in essence, a take it or leave\nit proposition not subject to negotiation or feedback. See, e.g., SEC v. Shields, 744 F.3d 633,\n643-45 (10th Cir. 2014) (in assessing whether agreements were investment contracts, court\nlooked to whether “the investors actually had the type of control reserved under the agreements\nto obtain access to information necessary to protect, manage, and control their investments at the\ntime they purchased their interests.”).\nSecond, the pseudonymity and dispersion of the DAO Token holders made it difficult for\nthem to join together to effect change or to exercise meaningful control. Investments in The\nDAO were made pseudonymously (such that the real-world identities of investors are not\napparent), and there was great dispersion among those individuals and/or entities who were\ninvested in The DAO and thousands of individuals and/or entities that traded DAO Tokens in the\nsecondary market—an arrangement that bears little resemblance to that of a genuine general\npartnership. Cf. Williamson v. Tucker, 645 F.2d 404, 422-24 (5th Cir. 1981) (“[O]ne would not\nexpect partnership interests sold to large numbers of the general public to provide any real\npartnership control; at some point there would be so many [limited] partners that a partnership\nvote would be more like a corporate vote, each partner’s role having been diluted to the level of a\nsingle shareholder in a corporation.”).39 Slock.it did create and maintain online forums on which\n 38 Because, in part, The DAO never commenced its business operations funding projects, this Report does not\nanalyze the question whether anyone associated with The DAO was an “[i]nvestment adviser” under Section\n202(a)(11) of the Investment Advisers Act of 1940 (“Advisers Act”). See 15 U.S.C. § 80b-2(a)(11). Those who\nwould use virtual organizations should consider their obligations under the Advisers Act.\n39 The Fifth Circuit in Williamson stated that:\n15\ninvestors could submit posts regarding contract proposals, which were not limited to use by\nDAO Token holders (anyone was permitted to post). However, DAO Token holders were\npseudonymous, as were their posts to the forums. Those facts, combined with the sheer number\nof DAO Token holders, potentially made the forums of limited use if investors hoped to\nconsolidate their votes into blocs powerful enough to assert actual control. This was later\ndemonstrated through the fact that DAO Token holders were unable to effectively address the\nAttack without the assistance of Slock.it and others. The DAO Token holders’ pseudonymity\nand dispersion diluted their control over The DAO. See Merchant Capital, 483 F.3d at 758\n(finding geographic dispersion of investors weighing against investor control).\nThese facts diminished the ability of DAO Token holders to exercise meaningful control\nover the enterprise through the voting process, rendering the voting rights of DAO Token holders\nakin to those of a corporate shareholder. Steinhardt Group, Inc. v. Citicorp., 126 F.3d 144, 152\n(3d Cir. 1997) (“It must be emphasized that the assignment of nominal or limited responsibilities\nto the participant does not negate the existence of an investment contract; where the duties\nassigned are so narrowly circumscribed as to involve little real choice of action … a security may\nbe found to exist … . [The] emphasis must be placed on economic reality.”) (citing SEC v.\nKoscot Interplanetary, Inc., 497 F.2d 473, 483 n. 14 (5th Cir. 1974)).\nBy contract and in reality, DAO Token holders relied on the significant managerial\nefforts provided by Slock.it and its co-founders, and The DAO’s Curators, as described above.\nTheir efforts, not those of DAO Token holders, were the “undeniably significant” ones, essential\nto the overall success and profitability of any investment into The DAO. See Glenn W. Turner,\n474 F.2d at 482.\nC. Issuers Must Register Offers and Sales of Securities Unless a Valid Exemption\nApplies\nThe definition of “issuer” is broadly defined to include “every person who issues or\nproposes to issue any security” and “person” includes “any unincorporated organization.” 15\nU.S.C. § 77b(a)(4). The term “issuer” is flexibly construed in the Section 5 context “as issuers\ndevise new ways to issue their securities and the definition of a security itself expands.” Doran\nv. Petroleum Mgmt. Corp., 545 F.2d 893, 909 (5th Cir. 1977); accord SEC v. Murphy, 626 F.2d\n633, 644 (9th Cir. 1980) (“[W]hen a person [or entity] organizes or sponsors the organization of\n\nA general partnership or joint venture interest can be designated a security if the investor can\nestablish, for example, that (1) an agreement among the parties leaves so little power in the hands\nof the partner or venture that the arrangement in fact distributes power as would a limited\npartnership; or (2) the partner or venturer is so inexperienced and unknowledgeable in business\naffairs that he is incapable of intelligently exercising his partnership or venture powers; or (3) the\npartner or venturer is so dependent on some unique entrepreneurial or managerial ability of the\npromoter or manager that he cannot replace the manager of the enterprise or otherwise exercise\nmeaningful partnership or venture powers.\nWilliamson, 645 F.2d at 424 & n.15 (court also noting that, “this is not to say that other factors could not\nalso give rise to such a dependence on the promoter or manager that the exercise of partnership powers\nwould be effectively precluded.”).\n16\nlimited partnerships and is primarily responsible for the success or failure of the venture for\nwhich the partnership is formed, he will be considered an issuer … .”).\nThe DAO, an unincorporated organization, was an issuer of securities, and information\nabout The DAO was “crucial” to the DAO Token holders’ investment decision. See Murphy,\n626 F.2d at 643 (“Here there is no company issuing stock, but instead, a group of individuals\ninvesting funds in an enterprise for profit, and receiving in return an entitlement to a percentage\nof the proceeds of the enterprise.”) (citation omitted). The DAO was “responsible for the\nsuccess or failure of the enterprise,” and accordingly was the entity about which the investors\nneeded information material to their investment decision. Id. at 643-44.\nDuring the Offering Period, The DAO offered and sold DAO Tokens in exchange for\nETH through The DAO Website, which was publicly-accessible, including to individuals in the\nUnited States. During the Offering Period, The DAO sold approximately 1.15 billion DAO\nTokens in exchange for a total of approximately 12 million ETH, which was valued in USD, at\nthe time, at approximately $150 million. Because DAO Tokens were securities, The DAO was\nrequired to register the offer and sale of DAO Tokens, unless a valid exemption from such\nregistration applied.\nMoreover, those who participate in an unregistered offer and sale of securities not subject\nto a valid exemption are liable for violating Section 5. See, e.g., Murphy, 626 F.2d at 650-51\n(“[T]hose who ha[ve] a necessary role in the transaction are held liable as participants.”) (citing\nSEC v. North Am. Research & Dev. Corp., 424 F.2d 63, 81 (2d Cir. 1970); SEC v. Culpepper,\n270 F.2d 241, 247 (2d Cir. 1959); SEC v. International Chem. Dev. Corp., 469 F.2d 20, 28 (10th\nCir. 1972); Pennaluna & Co. v. SEC, 410 F.2d 861, 864 n.1, 868 (9th Cir. 1969)); SEC v.\nSoftpoint, Inc., 958 F. Supp 846, 859-60 (S.D.N.Y. 1997) (“The prohibitions of Section 5 …\nsweep[] broadly to encompass ‘any person’ who participates in the offer or sale of an\nunregistered, non-exempt security.”); SEC v. Chinese Consol. Benevolent Ass’n., 120 F.2d 738,\n740-41 (2d Cir. 1941) (defendant violated Section 5(a) “because it engaged in selling\nunregistered securities” issued by a third party “when it solicited offers to buy the securities ‘for\nvalue’”).\nD. A System that Meets the Definition of an Exchange Must Register as a National\nSecurities Exchange or Operate Pursuant to an Exemption from Such Registration\nSection 5 of the Exchange Act makes it unlawful for any broker, dealer, or exchange,\ndirectly or indirectly, to effect any transaction in a security, or to report any such transaction, in\ninterstate commerce, unless the exchange is registered as a national securities exchange under\nSection 6 of the Exchange Act, or is exempted from such registration. See 15 U.S.C. §78e.\nSection 3(a)(1) of the Exchange Act defines an “exchange” as “any organization, association, or\ngroup of persons, whether incorporated or unincorporated, which constitutes, maintains, or\nprovides a market place or facilities for bringing together purchasers and sellers of securities or\nfor otherwise performing with respect to securities the functions commonly performed by a stock\nexchange as that term is generally understood … .” 15 U.S.C. § 78c(a)(1).\nExchange Act Rule 3b-16(a) provides a functional test to assess whether a trading system\nmeets the definition of exchange under Section 3(a)(1). Under Exchange Act Rule 3b-16(a), an \n17\norganization, association, or group of persons shall be considered to constitute, maintain, or\nprovide “a marketplace or facilities for bringing together purchasers and sellers of securities or\nfor otherwise performing with respect to securities the functions commonly performed by a stock\nexchange,” if such organization, association, or group of persons: (1) brings together the orders\nfor securities of multiple buyers and sellers; and (2) uses established, non-discretionary methods\n(whether by providing a trading facility or by setting rules) under which such orders interact with\neach other, and the buyers and sellers entering such orders agree to the terms of the trade.40\nA system that meets the criteria of Rule 3b-16(a), and is not excluded under Rule 3b16(b),\nmust register as a national securities exchange pursuant to Sections 5 and 6 of the\nExchange Act\n41 or operate pursuant to an appropriate exemption. One frequently used\nexemption is for alternative trading systems (“ATS”).42 Rule 3a1-1(a)(2) exempts from the\ndefinition of “exchange” under Section 3(a)(1) an ATS that complies with Regulation ATS,43\nwhich includes, among other things, the requirement to register as a broker-dealer and file a\nForm ATS with the Commission to provide notice of the ATS’s operations. Therefore, an ATS\nthat operates pursuant to the Rule 3a1-1(a)(2) exemption and complies with Regulation ATS\nwould not be subject to the registration requirement of Section 5 of the Exchange Act.\nThe Platforms that traded DAO Tokens appear to have satisfied the criteria of Rule 3b16(a)\nand do not appear to have been excluded from Rule 3b-16(b). As described above, the\nPlatforms provided users with an electronic system that matched orders from multiple parties to\nbuy and sell DAO Tokens for execution based on non-discretionary methods\n\nConclusion and References for Additional Guidance\nWhether or not a particular transaction involves the offer and sale of a security—\nregardless of the terminology used—will depend on the facts and circumstances, including the\n 40 See 17 C.F.R. § 240.3b-16(a). The Commission adopted Rule 3b-16(b) to exclude explicitly certain systems that\nthe Commission believed did not meet the exchange definition. These systems include systems that merely route\norders to other execution facilities and systems that allow persons to enter orders for execution against the bids and\noffers of a single dealer system. See Securities Exchange Act Rel. No. 40760 (Dec. 8, 1998), 63 FR 70844 (Dec. 22,\n1998) (Regulation of Exchanges and Alternative Trading Systems) (“Regulation ATS”), 70852.\n41 15 U.S.C. § 78e. A “national securities exchange” is an exchange registered as such under Section 6 of the\nExchange Act. 15 U.S.C. § 78f.\n42 Rule 300(a) of Regulation ATS promulgated under the Exchange Act provides that an ATS is:\nany organization, association, person, group of persons, or system: (1) [t]hat constitutes,\nmaintains, or provides a market place or facilities for bringing together purchasers and sellers of\nsecurities or for otherwise performing with respect to securities the functions commonly\nperformed by a stock exchange within the meaning of [Exchange Act Rule 3b-16]; and (2) [t]hat\ndoes not: (i) [s]et rules governing the conduct of subscribers other than the conduct of subscribers’\ntrading on such [ATS]; or (ii) [d]iscipline subscribers other than by exclusion from trading.\nRegulation ATS, supra note 40, Rule 300(a).\n43 See 17 C.F.R. § 240.3a1-1(a)(2). Rule 3a1-1 also provides two other exemptions from the definition of\n“exchange” for any ATS operated by a national securities association, and any ATS not required to comply with\nRegulation ATS pursuant to Rule 301(a) of Regulation ATS. See 17 C.F.R. §§ 240.3a1-1(a)(1) and (3).\n18\neconomic realities of the transaction. Those who offer and sell securities in the United States\nmust comply with the federal securities laws, including the requirement to register with the\nCommission or to qualify for an exemption from the registration requirements of the federal\nsecurities laws. The registration requirements are designed to provide investors with procedural\nprotections and material information necessary to make informed investment decisions. These\nrequirements apply to those who offer and sell securities in the United States, regardless whether\nthe issuing entity is a traditional company or a decentralized autonomous organization,\nregardless whether those securities are purchased using U.S. dollars or virtual currencies, and\nregardless whether they are distributed in certificated form or through distributed ledger\ntechnology. In addition, any entity or person engaging in the activities of an exchange, such as\nbringing together the orders for securities of multiple buyers and sellers using established nondiscretionary\nmethods under which such orders interact with each other and buyers and sellers\nentering such orders agree upon the terms of the trade, must register as a national securities\nexchange or operate pursuant to an exemption from such registration.\nTo learn more about registration requirements under the Securities Act, please visit the\nCommission’s website here. To learn more about the Commission’s registration requirements\nfor investment companies, please visit the Commission’s website here. To learn more about the\nCommission’s registration requirements for national securities exchanges, please visit the\nCommission’s website here. To learn more about alternative trading systems, please see the\nRegulation ATS adopting release here.\nFor additional guidance, please see the following Commission enforcement actions\ninvolving virtual currencies:\n• SEC v. Trendon T. Shavers and Bitcoin Savings and Trust, Civil Action No. 4:13-\nCV-416 (E.D. Tex., complaint filed July 23, 2013)\n• In re Erik T. Voorhees, Rel. No. 33-9592 (June 3, 2014)\n• In re BTC Trading, Corp. and Ethan Burnside, Rel. No. 33-9685 (Dec. 8, 2014)\n• SEC v. Homero Joshua Garza, Gaw Miners, LLC, and ZenMiner, LLC (d/b/a Zen\nCloud), Civil Action No. 3:15-CV-01760 (D. Conn., complaint filed Dec. 1,\n2015)\n• In re Bitcoin Investment Trust and SecondMarket, Inc., Rel. No. 34-78282 (July\n11, 2016)\n• In re Sunshine Capital, Inc., File No. 500-1 (Apr. 11, 2017)\nAnd please see the following investor alerts:\n• Bitcoin and Other Virtual Currency-Related Investments (May 7, 2014)\n• Ponzi Schemes Using Virtual Currencies (July 2013)\nBy the Commission",
      "json_metadata": "{\"tags\":[\"crypto\",\"dao\",\"token\",\"1-dao\"],\"image\":[\"https://img.youtube.com/vi/49wHQoJxYPo/0.jpg\",\"https://img.youtube.com/vi/ON5GhIQdFU8/0.jpg\"],\"links\":[\"http://www.virtualschool.edu/mon/Economics/SmartContracts.html\",\"http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potentialaml-cft-risks.pdf\",\"https://slock.it/\",\"https://download.slock.it/public/DAO/WhitePaper.pdf\",\"https://blog.slock.it/the-history-of-the-dao-and-lessons-learned-d06740f8cfa5#.5o62zo8uv\",\"https://www.sec.gov/info/smallbus/secg/rccomplianceguide-051316.htm;\",\"https://www.sec.gov/oiea/investor-alerts-bulletins/ib_crowdfunding-.html\",\"https://www.youtube.com/watch?v=49wHQoJxYPo\",\"https://slock.it\",\"https://github.com/slockit/DAO\",\"https://daohub.org\",\"https://blog.slock.it/deja-vu-dai-smart-contracts-audit-results-d26bc088e32e\",\"http://hackingdistributed.com/2016/05/27/dao-call-for-moratorium/\",\"https://www.youtube.com/watch?v=ON5GhIQdFU8\",\"https://cointelegraph.com/news/are-the-dao-curators-masters-or-janitors\",\"https://blog.slock.it/bothour-proposals-are-now-out-voting-starts-saturday-morning-ba322d6d3aea\",\"https://blog.slock.it/dao-security-a-proposal-toguarantee-the-integrity-of-the-dao-3473899ace9d\",\"https://etherscan.io/token/thedao-proposal/5\",\"https://blog.slock.it/daosecurity-advisory-live-updates-2a0a42a2d07b\",\"https://blog.slock.it/whatthe-fork-really-means-6fe573ac31dd\"],\"app\":\"steemit/0.1\",\"format\":\"markdown\"}",
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      "permlink": "securities-and-exchange-commission-securities-exchange-act-of-1934-release-no-81207-july-25-2017-report-of-investigation",
      "title": "SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 81207 / July 25, 2017 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO"
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      "body": "I. Introduction and Summary\nThe United States Securities and Exchange Commission’s (“Commission”) Division of\nEnforcement (“Division”) has investigated whether The DAO, an unincorporated organization;\nSlock.it UG (“Slock.it”), a German corporation; Slock.it’s co-founders; and intermediaries may\nhave violated the federal securities laws. The Commission has determined not to pursue an\nenforcement action in this matter based on the conduct and activities known to the Commission\nat this time.\nAs described more fully below, The DAO is one example of a Decentralized\nAutonomous Organization, which is a term used to describe a “virtual” organization embodied in\ncomputer code and executed on a distributed ledger or blockchain. The DAO was created by\nSlock.it and Slock.it’s co-founders, with the objective of operating as a for-profit entity that\nwould create and hold a corpus of assets through the sale of DAO Tokens to investors, which\nassets would then be used to fund “projects.” The holders of DAO Tokens stood to share in the\nanticipated earnings from these projects as a return on their investment in DAO Tokens. In\naddition, DAO Token holders could monetize their investments in DAO Tokens by re-selling\nDAO Tokens on a number of web-based platforms (“Platforms”) that supported secondary\ntrading in the DAO Tokens.\nAfter DAO Tokens were sold, but before The DAO was able to commence funding\nprojects, an attacker used a flaw in The DAO’s code to steal approximately one-third of The\nDAO’s assets. Slock.it’s co-founders and others responded by creating a work-around whereby\nDAO Token holders could opt to have their investment returned to them, as described in more\ndetail below.\nThe investigation raised questions regarding the application of the U.S. federal securities\nlaws to the offer and sale of DAO Tokens, including the threshold question whether DAO\nTokens are securities. Based on the investigation, and under the facts presented, the Commission\nhas determined that DAO Tokens are securities under the Securities Act of 1933 (“Securities\nAct”) and the Securities Exchange Act of 1934 (“Exchange Act”).\n1\n The Commission deems it\nappropriate and in the public interest to issue this report of investigation (“Report”) pursuant to\n 1\n This Report does not analyze the question whether The DAO was an “investment company,” as defined under\nSection 3(a) of the Investment Company Act of 1940 (“Investment Company Act”), in part, because The DAO never\ncommenced its business operations funding projects. Those who would use virtual organizations should consider\ntheir obligations under the Investment Company Act.\n2\nSection 21(a) of the Exchange Act2 to advise those who would use a Decentralized Autonomous\nOrganization (“DAO Entity”), or other distributed ledger or blockchain-enabled means for\ncapital raising, to take appropriate steps to ensure compliance with the U.S. federal securities\nlaws. All securities offered and sold in the United States must be registered with the\nCommission or must qualify for an exemption from the registration requirements. In addition,\nany entity or person engaging in the activities of an exchange must register as a national\nsecurities exchange or operate pursuant to an exemption from such registration.\nThis Report reiterates these fundamental principles of the U.S. federal securities laws and\ndescribes their applicability to a new paradigm—virtual organizations or capital raising entities\nthat use distributed ledger or blockchain technology to facilitate capital raising and/or investment\nand the related offer and sale of securities. The automation of certain functions through this\ntechnology, “smart contracts,”3 or computer code, does not remove conduct from the purview of\nthe U.S. federal securities laws.4 This Report also serves to stress the obligation to comply with\nthe registration provisions of the federal securities laws with respect to products and platforms\ninvolving emerging technologies and new investor interfaces.\nII. Facts\nA. Background\nFrom April 30, 2016 through May 28, 2016, The DAO offered and sold approximately\n1.15 billion DAO Tokens in exchange for a total of approximately 12 million Ether (“ETH”), a\n 2\n Section 21(a) of the Exchange Act authorizes the Commission to investigate violations of the federal securities\nlaws and, in its discretion, to “publish information concerning any such violations.” This Report does not constitute\nan adjudication of any fact or issue addressed herein, nor does it make any findings of violations by any individual\nor entity. The facts discussed in Section II, infra, are matters of public record or based on documentary records. We\nare publishing this Report on the Commission’s website to ensure that all market participants have concurrent and\nequal access to the information contained herein.\n3 Computer scientist Nick Szabo described a “smart contract” as:\na computerized transaction protocol that executes terms of a contract. The general objectives of\nsmart contract design are to satisfy common contractual conditions (such as payment terms, liens,\nconfidentiality, and even enforcement), minimize exceptions both malicious and accidental, and\nminimize the need for trusted intermediaries. Related economic goals include lowering fraud loss,\narbitrations and enforcement costs, and other transaction costs.\nSee Nick Szabo, Smart Contracts, 1994, http://www.virtualschool.edu/mon/Economics/SmartContracts.html.\n4 See SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 351 (1943) (“[T]he reach of the [Securities] Act does not\nstop with the obvious and commonplace. Novel, uncommon, or irregular devices, whatever they appear to be, are\nalso reached if it be proved as matter of fact that they were widely offered or dealt in under terms or courses of\ndealing which established their character in commerce as ‘investment contracts,’ or as ‘any interest or instrument\ncommonly known as a ‘security’.”); see also Reves v. Ernst & Young, 494 U.S. 56, 61 (1990) (“Congress’ purpose\nin enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name\nthey are called.”).\n3\nvirtual currency5 used on the Ethereum Blockchain.6\n As of the time the offering closed, the total\nETH raised by The DAO was valued in U.S. Dollars (“USD”) at approximately $150 million.\nThe concept of a DAO Entity is memorialized in a document (the “White Paper”),\nauthored by Christoph Jentzsch, the Chief Technology Officer of Slock.it, a “Blockchain and IoT\n[(internet-of-things)] solution company,” incorporated in Germany and co-founded by Christoph\nJentzsch, Simon Jentzsch (Christoph Jentzsch’s brother), and Stephan Tual (“Tual”).\n7\n The\nWhite Paper purports to describe “the first implementation of a [DAO Entity] code to automate\norganizational governance and decision making.”8\n The White Paper posits that a DAO Entity\n“can be used by individuals working together collaboratively outside of a traditional corporate\nform. It can also be used by a registered corporate entity to automate formal governance rules\ncontained in corporate bylaws or imposed by law.” The White Paper proposes an entity—a\nDAO Entity—that would use smart contracts to attempt to solve governance issues it described\nas inherent in traditional corporations.9\n As described, a DAO Entity purportedly would supplant\ntraditional mechanisms of corporate governance and management with a blockchain such that\ncontractual terms are “formalized, automated and enforced using software.”10\n 5\n The Financial Action Task Force defines “virtual currency” as:\na digital representation of value that can be digitally traded and functions as: (1) a medium of\nexchange; and/or (2) a unit of account; and/or (3) a store of value, but does not have legal tender\nstatus (i.e., when tendered to a creditor, is a valid and legal offer of payment) in any jurisdiction.\nIt is not issued or guaranteed by any jurisdiction, and fulfils the above functions only by\nagreement within the community of users of the virtual currency. Virtual currency is distinguished\nfrom fiat currency (a.k.a. “real currency,” “real money,” or “national currency”), which is the coin\nand paper money of a country that is designated as its legal tender; circulates; and is customarily\nused and accepted as a medium of exchange in the issuing country. It is distinct from e-money,\nwhich is a digital representation of fiat currency used to electronically transfer value denominated\nin fiat currency.\nFATF Report, Virtual Currencies, Key Definitions and Potential AML/CFT Risks, FINANCIAL ACTION TASK FORCE\n(June 2014), http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potentialaml-cft-risks.pdf.\n6\n Ethereum, developed by the Ethereum Foundation, a Swiss nonprofit organization, is a decentralized platform that\nruns smart contracts on a blockchain known as the Ethereum Blockchain.\n7\n Christoph Jentzsch released the final draft of the White Paper on or around March 23, 2016. He introduced his\nconcept of a DAO Entity as early as November 2015 at an Ethereum Developer Conference in London, as a medium\nto raise funds for Slock.it, a German start-up he co-founded in September 2015. Slock.it purports to create\ntechnology that embeds smart contracts that run on the Ethereum Blockchain into real-world devices and, as a result,\nfor example, permits anyone to rent, sell or share physical objects in a decentralized way. See SLOCK.IT,\nhttps://slock.it/.\n8\n Christoph Jentzsch, Decentralized Autonomous Organization to Automate Governance Final Draft – Under\nReview, https://download.slock.it/public/DAO/WhitePaper.pdf.\n9\n Id.\n10 Id. The White Paper contained the following statement:\nA word of caution, at the outset: the legal status of [DAO Entities] remains the subject of active\nand vigorous debate and discussion. Not everyone shares the same definition. Some have said\nthat [DAO Entities] are autonomous code and can operate independently of legal systems; others \n\nThe DAO\n“The DAO” is the “first generation” implementation of the White Paper concept of a\nDAO Entity, and it began as an effort to create a “crowdfunding contract” to raise “funds to grow\n[a] company in the crypto space.”11 In November 2015, at an Ethereum Developer Conference\nin London, Christoph Jentzsch described his proposal for The DAO as a “for-profit DAO\n[Entity],” where participants would send ETH (a virtual currency) to The DAO to purchase DAO\nTokens, which would permit the participant to vote and entitle the participant to “rewards.”12\nChristoph Jentzsch likened this to “buying shares in a company and getting … dividends.”13 The\nDAO was to be “decentralized” in that it would allow for voting by investors holding DAO\nTokens.\n14 All funds raised were to be held at an Ethereum Blockchain “address” associated with\nThe DAO and DAO Token holders were to vote on contract proposals, including proposals to\nThe DAO to fund projects and distribute The DAO’s anticipated earnings from the projects it\nfunded.\n15 The DAO was intended to be “autonomous” in that project proposals were in the form\nof smart contracts that exist on the Ethereum Blockchain and the votes were administered by the\ncode of The DAO.\n16\n\nhave said that [DAO Entities] must be owned or operate[d] by humans or human created entities.\nThere will be many use cases, and the DAO [Entity] code will develop over time. Ultimately,\nhow a DAO [Entity] functions and its legal status will depend on many factors, including how\nDAO [Entity] code is used, where it is used, and who uses it. This paper does not speculate about\nthe legal status of [DAO Entities] worldwide. This paper is not intended to offer legal advice or\nconclusions. Anyone who uses DAO [Entity] code will do so at their own risk.\nId.\n11 Christoph Jentzsch, The History of the DAO and Lessons Learned, SLOCK.IT BLOG (Aug. 24, 2016),\nhttps://blog.slock.it/the-history-of-the-dao-and-lessons-learned-d06740f8cfa5#.5o62zo8uv. Although The DAO has\nbeen described as a “crowdfunding contract,” The DAO would not have met the requirements of Regulation\nCrowdfunding, adopted under Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012 (providing an\nexemption from registration for certain crowdfunding), because, among other things, it was not a broker-dealer or a\nfunding portal registered with the SEC and the Financial Industry Regulatory Authority (“FINRA”). See Regulation\nCrowdfunding: A Small Entity Compliance Guide for Issuers, SEC (Apr. 5, 2017),\nhttps://www.sec.gov/info/smallbus/secg/rccomplianceguide-051316.htm; Updated Investor Bulletin: Crowdfunding\nfor Investors, SEC (May 10, 2017), https://www.sec.gov/oiea/investor-alerts-bulletins/ib_crowdfunding-.html.\n12 See Slockit, Slock.it DAO demo at Devcon1: IoT + Blockchain, YOUTUBE (Nov. 13, 2015),\nhttps://www.youtube.com/watch?v=49wHQoJxYPo.\n13 Id.\n14 See Jentzsch, supra note 8.\n15 Id. In theory, there was no limitation on the type of project that could be proposed. For example, proposed\n“projects” could include, among other things, projects that would culminate in the creation of products or services\nthat DAO Token holders could use or charge others for using.\n16 Id.\n5\nOn or about April 29, 2016, Slock.it deployed The DAO code on the Ethereum\nBlockchain, as a set of pre-programmed instructions.\n17 This code was to govern how The DAO\nwas to operate.\nTo promote The DAO, Slock.it’s co-founders launched a website (“The DAO Website”).\nThe DAO Website included a description of The DAO’s intended purpose: “To blaze a new path\nin business for the betterment of its members, existing simultaneously nowhere and everywhere\nand operating solely with the steadfast iron will of unstoppable code.”18 The DAO Website also\ndescribed how The DAO operated, and included a link through which DAO Tokens could be\npurchased. The DAO Website also included a link to the White Paper, which provided detailed\ninformation about a DAO Entity’s structure and its source code and, together with The DAO\nWebsite, served as the primary source of promotional materials for The DAO. On The DAO\nWebsite and elsewhere, Slock.it represented that The DAO’s source code had been reviewed by\n“one of the world’s leading security audit companies” and “no stone was left unturned during\nthose five whole days of security analysis.”19\nSlock.it’s co-founders also promoted The DAO by soliciting media attention and by\nposting almost daily updates on The DAO’s status on The DAO and Slock.it websites and\nnumerous online forums relating to blockchain technology. Slock.it’s co-founders used these\nposts to communicate to the public information about how to participate in The DAO, including:\nhow to create and acquire DAO Tokens; the framework for submitting proposals for projects;\nand how to vote on proposals. Slock.it also created an online forum on The DAO Website, as\nwell as administered “The DAO Slack” channel, an online messaging platform in which over\n5,000 invited “team members” could discuss and exchange ideas about The DAO in real time.\n1. DAO Tokens\nIn exchange for ETH, The DAO created DAO Tokens (proportional to the amount of\nETH paid) that were then assigned to the Ethereum Blockchain address of the person or entity\nremitting the ETH. A DAO Token granted the DAO Token holder certain voting and ownership\nrights. According to promotional materials, The DAO would earn profits by funding projects\n 17 According to the White Paper, a DAO Entity is “activated by deployment on the Ethereum [B]lockchain. Once\ndeployed, a [DAO Entity’s] code requires ‘ether’ [ETH] to engage in transactions on Ethereum. Ether is the digital\nfuel that powers the Ethereum Network.” The only way to update or alter The DAO’s code is to submit a new\nproposal for voting and achieve a majority consensus on that proposal. See Jentzsch, supra note 8. According to\nSlock.it’s website, Slock.it gave The DAO code to the Ethereum community, noting that:\nThe DAO framework is [a] side project of Slock.it UG and a gift to the Ethereum community. It\nconsisted of a definitive whitepaper, smart contract code audited by one of the best security\ncompanies in the world and soon, a complete frontend interface. All free and open source for\nanyone to re-use, it is our way to say ‘thank you’ to the community.\nSLOCK.IT, https://slock.it. The DAO code is publicly-available on GitHub, a host of source code. See The Standard\nDAO Framework, Inc., Whitepaper, GITHUB, https://github.com/slockit/DAO.\n18 The DAO Website was available at https://daohub.org.\n19 Stephen Tual, Deja Vu DAO Smart Contracts Audit Results, SLOCK.IT BLOG (Apr. 5, 2016),\nhttps://blog.slock.it/deja-vu-dai-smart-contracts-audit-results-d26bc088e32e.\n6\nthat would provide DAO Token holders a return on investment. The various promotional\nmaterials disseminated by Slock.it’s co-founders touted that DAO Token holders would receive\n“rewards,” which the White Paper defined as, “any [ETH] received by a DAO [Entity] generated\nfrom projects the DAO [Entity] funded.” DAO Token holders would then vote to either use the\nrewards to fund new projects or to distribute the ETH to DAO Token holders.\nFrom April 30, 2016 through May 28, 2016 (the “Offering Period”), The DAO offered\nand sold DAO Tokens. Investments in The DAO were made “pseudonymously” (i.e., an\nindividual’s or entity’s pseudonym was their Ethereum Blockchain address). To purchase a\nDAO Token offered for sale by The DAO, an individual or entity sent ETH from their Ethereum\nBlockchain address to an Ethereum Blockchain address associated with The DAO. All of the\nETH raised in the offering as well as any future profits earned by The DAO were to be pooled\nand held in The DAO’s Ethereum Blockchain address. The token price fluctuated in a range of\napproximately 1 to 1.5 ETH per 100 DAO Tokens, depending on when the tokens were\npurchased during the Offering Period. Anyone was eligible to purchase DAO Tokens (as long as\nthey paid ETH). There were no limitations placed on the number of DAO Tokens offered for\nsale, the number of purchasers of DAO Tokens, or the level of sophistication of such purchasers.\nDAO Token holders were not restricted from re-selling DAO Tokens acquired in the\noffering, and DAO Token holders could sell their DAO Tokens in a variety of ways in the\nsecondary market and thereby monetize their investment as discussed below. Prior to the\nOffering Period, Slock.it solicited at least one U.S. web-based platform to trade DAO Tokens on\nits system and, at the time of the offering, The DAO Website and other promotional materials\ndisseminated by Slock.it included representations that DAO Tokens would be available for\nsecondary market trading after the Offering Period via several platforms. During the Offering\nPeriod and afterwards, the Platforms posted notices on their own websites and on social media\nthat each planned to support secondary market trading of DAO Tokens.20\nIn addition to secondary market trading on the Platforms, after the Offering Period, DAO\nTokens were to be freely transferable on the Ethereum Blockchain. DAO Token holders would\nalso be permitted to redeem their DAO Tokens for ETH through a complicated, multi-week\n(approximately 46-day) process referred to as a DAO Entity “split.”21\n2. Participants in The DAO\nAccording to the White Paper, in order for a project to be considered for funding with “a\nDAO [Entity]’s [ETH],” a “Contractor” first must submit a proposal to the DAO Entity.\nSpecifically, DAO Token holders expected Contractors to submit proposals for projects that\ncould provide DAO Token holders returns on their investments. Submitting a proposal to The\nDAO involved: (1) writing a smart contract, and then deploying and publishing it on the\n 20 The Platforms are registered with FinCEN as “Money Services Businesses” and provide systems whereby\ncustomers may exchange virtual currencies for other virtual currencies or fiat currencies.\n21 According to the White Paper, the primary purpose of a split is to protect minority shareholders and prevent what\nis commonly referred to as a “51% Attack,” whereby an attacker holding 51% of a DAO Entity’s Tokens could\ncreate a proposal to send all of the DAO Entity’s funds to himself or herself.\n7\nEthereum Blockchain; and (2) posting details about the proposal on The DAO Website,\nincluding the Ethereum Blockchain address of the deployed contract and a link to its source\ncode. Proposals could be viewed on The DAO Website as well as other publicly-accessible\nwebsites. Per the White Paper, there were two prerequisites for submitting a proposal. An\nindividual or entity must: (1) own at least one DAO Token; and (2) pay a deposit in the form of\nETH that would be forfeited to the DAO Entity if the proposal was put up for a vote and failed to\nachieve a quorum of DAO Token holders. It was publicized that Slock.it would be the first to\nsubmit a proposal for funding.22\nETH raised by The DAO was to be distributed to a Contractor to fund a proposal only on\na majority vote of DAO Token holders.23 DAO Token holders were to cast votes, which would\nbe weighted by the number of tokens they controlled, for or against the funding of a specific\nproposal. The voting process, however, was publicly criticized in that it could incentivize\ndistorted voting behavior and, as a result, would not accurately reflect the consensus of the\nmajority of DAO Token holders. Specifically, as noted in a May 27, 2016 blog post by a group\nof computer security researchers, The DAO’s structure included a “strong positive bias to vote\nYES on proposals and to suppress NO votes as a side effect of the way in which it restricts users’\nrange of options following the casting of a vote.”24\nBefore any proposal was put to a vote by DAO Token holders, it was required to be\nreviewed by one or more of The DAO’s “Curators.” At the time of the formation of The DAO,\nthe Curators were a group of individuals chosen by Slock.it.25 According to the White Paper, the\nCurators of a DAO Entity had “considerable power.” The Curators performed crucial security\nfunctions and maintained ultimate control over which proposals could be submitted to, voted on,\nand funded by The DAO. As stated on The DAO Website during the Offering Period, The DAO\nrelied on its Curators for “failsafe protection” and for protecting The DAO from “malicous [sic]\nactors.” Specifically, per The DAO Website, a Curator was responsible for: (1) confirming that\nany proposal for funding originated from an identifiable person or organization; and (2)\n 22 It was stated on The DAO Website and elsewhere that Slock.it anticipated that it would be the first to submit a\nproposal for funding. In fact, a draft of Slock.it’s proposal for funding for an “Ethereum Computer and Universal\nSharing Network” was publicly-available online during the Offering Period.\n23 DAO Token holders could vote on proposals, either by direct interaction with the Ethereum Blockchain or by\nusing an application that interfaces with the Ethereum Blockchain. It was generally acknowledged that DAO Token\nholders needed some technical knowledge in order to submit a vote, and The DAO Website included a link to a stepby-step\ntutorial describing how to vote on proposals.\n24 By voting on a proposal, DAO Token holders would “tie up” their tokens until the end of the voting cycle. See\nJentzsch, supra note 8 at 8 (“The tokens used to vote will be blocked, meaning they can not [sic] be transferred until\nthe proposal is closed.”). If, however, a DAO Token holder abstained from voting, the DAO Token holder could\navoid these restrictions; any DAO Tokens not submitted for a vote could be withdrawn or transferred at any time.\nAs a result, DAO Token holders were incentivized either to vote yes or to abstain from voting. See Dino Mark et al.,\nA Call for a Temporary Moratorium on The DAO, HACKING, DISTRIBUTED (May 27, 2016, 1:35 PM),\nhttp://hackingdistributed.com/2016/05/27/dao-call-for-moratorium/.\n25 At the time of The DAO’s launch, The DAO Website identified eleven “high profile” individuals as holders of\nThe DAO’s Curator “Multisig” (or “private key”). These individuals all appear to live outside of the United States.\nMany of them were associated with the Ethereum Foundation, and The DAO Website touted the qualifications and\ntrustworthiness of these individuals.\n8\nconfirming that smart contracts associated with any such proposal properly reflected the code the\nContractor claims to have deployed on the Ethereum Blockchain. If a Curator determined that\nthe proposal met these criteria, the Curator could add the proposal to the “whitelist,” which was a\nlist of Ethereum Blockchain addresses that could receive ETH from The DAO if the majority of\nDAO Token holders voted for the proposal.\nCurators of The DAO had ultimate discretion as to whether or not to submit a proposal\nfor voting by DAO Token holders. Curators also determined the order and frequency of\nproposals, and could impose subjective criteria for whether the proposal should be whitelisted.\nOne member of the group chosen by Slock.it to serve collectively as the Curator stated publicly\nthat the Curator had “complete control over the whitelist … the order in which things get\nwhitelisted, the duration for which [proposals] get whitelisted, when things get unwhitelisted …\n[and] clear ability to control the order and frequency of proposals,” noting that “curators have\ntremendous power.”26 Another Curator publicly announced his subjective criteria for\ndetermining whether to whitelist a proposal, which included his personal ethics.27 Per the White\nPaper, a Curator also had the power to reduce the voting quorum requirement by 50% every\nother week. Absent action by a Curator, the quorum could be reduced by 50% only if no\nproposal had reached the required quorum for 52 weeks.\n3. Secondary Market Trading on the Platforms\nDuring the period from May 28, 2016 through early September 2016, the Platforms\nbecame the preferred vehicle for DAO Token holders to buy and sell DAO Tokens in the\nsecondary market using virtual or fiat currencies. Specifically, the Platforms used electronic\nsystems that allowed their respective customers to post orders for DAO Tokens on an\nanonymous basis. For example, customers of each Platform could buy or sell DAO Tokens by\nentering a market order on the Platform’s system, which would then match with orders from\nother customers residing on the system. Each Platform’s system would automatically execute\nthese orders based on pre-programmed order interaction protocols established by the Platform.\nNone of the Platforms received orders for DAO Tokens from non-Platform customers or\nrouted its respective customers’ orders to any other trading destinations. The Platforms publicly\ndisplayed all their quotes, trades, and daily trading volume in DAO Tokens on their respective\nwebsites. During the period from May 28, 2016 through September 6, 2016, one such Platform\nexecuted more than 557,378 buy and sell transactions in DAO Tokens by more than 15,000 of its\nU.S. and foreign customers. During the period from May 28, 2016 through August 1, 2016,\nanother such Platform executed more than 22,207 buy and sell transactions in DAO Tokens by\nmore than 700 of its U.S. customers.\n 26 Epicenter, EB134 – Emin Gün Sirer And Vlad Zamfir: On A Rocky DAO, YOUTUBE (June 6, 2016),\nhttps://www.youtube.com/watch?v=ON5GhIQdFU8.\n27 Andrew Quentson, Are the DAO Curators Masters or Janitors?, THE COIN TELEGRAPH (June 12, 2016),\nhttps://cointelegraph.com/news/are-the-dao-curators-masters-or-janitors.\n9\n4. Security Concerns, The “Attack” on The DAO, and The Hard Fork\nIn late May 2016, just prior to the expiration of the Offering Period, concerns about the\nsafety and security of The DAO’s funds began to surface due to vulnerabilities in The DAO’s\ncode. On May 26, 2016, in response to these concerns, Slock.it submitted a “DAO Security\nProposal” that called for the development of certain updates to The DAO’s code and the\nappointment of a security expert.28 Further, on June 3, 2016, Christoph Jentzsch, on behalf of\nSlock.it, proposed a moratorium on all proposals until alterations to The DAO’s code to fix\nvulnerabilities in The DAO’s code had been implemented.29\nOn June 17, 2016, an unknown individual or group (the “Attacker”) began rapidly\ndiverting ETH from The DAO, causing approximately 3.6 million ETH—1/3 of the total ETH\nraised by The DAO offering—to move from The DAO’s Ethereum Blockchain address to an\nEthereum Blockchain address controlled by the Attacker (the “Attack”).\n30 Although the diverted\nETH was then held in an address controlled by the Attacker, the Attacker was prevented by The\nDAO’s code from moving the ETH from that address for 27 days.\n31\nIn order to secure the diverted ETH and return it to DAO Token holders, Slock.it’s cofounders\nand others endorsed a “Hard Fork” to the Ethereum Blockchain. The “Hard Fork,”\ncalled for a change in the Ethereum protocol on a going forward basis that would restore the\nDAO Token holders’ investments as if the Attack had not occurred. On July 20, 2016, after a\nmajority of the Ethereum network adopted the necessary software updates, the new, forked\nEthereum Blockchain became active.32 The Hard Fork had the effect of transferring all of the\nfunds raised (including those held by the Attacker) from The DAO to a recovery address, where\nDAO Token holders could exchange their DAO Tokens for ETH.33 All DAO Token holders\n 28 See Stephan Tual, Proposal #1-DAO Security, Redux, SLOCK.IT BLOG (May 26, 2016), https://blog.slock.it/bothour-proposals-are-now-out-voting-starts-saturday-morning-ba322d6d3aea.\nThe unnamed security expert would “act\nas the first point of contact for security disclosures, and continually monitor, pre-empt and avert any potential attack\nvectors The DAO may face, including social, technical and economic attacks.” Id. Slock.it initially proposed a\nmuch broader security proposal that included the formation of a “DAO Security” group, the establishment of a “Bug\nBounty Program,” and routine external audits of The DAO’s code. However, the cost of the proposal (125,000\nETH), which would be paid from The DAO’s funds, was immediately criticized as too high and Slock.it decided\ninstead to submit the revised proposal described above. See Stephan Tual, DAO.Security, a Proposal to guarantee\nthe integrity of The DAO, SLOCK.IT BLOG (May 25, 2016), https://blog.slock.it/dao-security-a-proposal-toguarantee-the-integrity-of-the-dao-3473899ace9d.\n29 See TheDAO Proposal_ID 5, ETHERSCAN, https://etherscan.io/token/thedao-proposal/5.\n30 See Stephan Tual, DAO Security Advisory: live updates, SLOCK.IT BLOG (June 17, 2016), https://blog.slock.it/daosecurity-advisory-live-updates-2a0a42a2d07b.\n31 Id.\n32 A minority group, however, elected not to adopt the new Ethereum Blockchain created by the Hard Fork because\nto do so would run counter to the concept that a blockchain is immutable. Instead they continued to use the former\nversion of the blockchain, which is now known as “Ethereum Classic.”\n33 See Christoph Jentzsch, What the ‘Fork’ Really Means, SLOCK.IT BLOG (July 18, 2016), https://blog.slock.it/whatthe-fork-really-means-6fe573ac31dd.\n10\nwho adopted the Hard Fork could exchange their DAO Tokens for ETH, and avoid any loss of\nthe ETH they had invested.\n\nDiscussion\nThe Commission is aware that virtual organizations and associated individuals and\nentities increasingly are using distributed ledger technology to offer and sell instruments such as\nDAO Tokens to raise capital. These offers and sales have been referred to, among other things,\nas “Initial Coin Offerings” or “Token Sales.” Accordingly, the Commission deems it\nappropriate and in the public interest to issue this Report in order to stress that the U.S. federal\nsecurities law may apply to various activities, including distributed ledger technology, depending\non the particular facts and circumstances, without regard to the form of the organization or\ntechnology used to effectuate a particular offer or sale. In this Report, the Commission considers\nthe particular facts and circumstances of the offer and sale of DAO Tokens to demonstrate the\napplication of existing U.S. federal securities laws to this new paradigm.\nA. Section 5 of the Securities Act\nThe registration provisions of the Securities Act contemplate that the offer or sale of\nsecurities to the public must be accompanied by the “full and fair disclosure” afforded by\nregistration with the Commission and delivery of a statutory prospectus containing information\nnecessary to enable prospective purchasers to make an informed investment decision.\nRegistration entails disclosure of detailed “information about the issuer’s financial condition, the\nidentity and background of management, and the price and amount of securities to be offered …\n.” SEC v. Cavanagh, 1 F. Supp. 2d 337, 360 (S.D.N.Y. 1998), aff’d, 155 F.3d 129 (2d Cir.\n1998). “The registration statement is designed to assure public access to material facts bearing\non the value of publicly traded securities and is central to the Act’s comprehensive scheme for\nprotecting public investors.” SEC v. Aaron, 605 F.2d 612, 618 (2d Cir. 1979) (citing SEC v.\nRalston Purina Co., 346 U.S. 119, 124 (1953)), vacated on other grounds, 446 U.S. 680 (1980).\nSection 5(a) of the Securities Act provides that, unless a registration statement is in effect as to a\nsecurity, it is unlawful for any person, directly or indirectly, to engage in the offer or sale of\nsecurities in interstate commerce. Section 5(c) of the Securities Act provides a similar\nprohibition against offers to sell, or offers to buy, unless a registration statement has been filed.\nThus, both Sections 5(a) and 5(c) of the Securities Act prohibit the unregistered offer or sale of\nsecurities in interstate commerce. 15 U.S.C. § 77e(a) and (c). Violations of Section 5 do not\nrequire scienter. SEC v. Universal Major Indus. Corp., 546 F.2d 1044, 1047 (2d Cir. 1976).\n 34 Id.\n11\nB. DAO Tokens Are Securities\n1. Foundational Principles of the Securities Laws Apply to Virtual\nOrganizations or Capital Raising Entities Making Use of Distributed\nLedger Technology\nUnder Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act, a\nsecurity includes “an investment contract.” See 15 U.S.C. §§ 77b-77c. An investment contract\nis an investment of money in a common enterprise with a reasonable expectation of profits to be\nderived from the entrepreneurial or managerial efforts of others. See SEC v. Edwards, 540 U.S.\n389, 393 (2004); SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946); see also United Housing\nFound., Inc. v. Forman, 421 U.S. 837, 852-53 (1975) (The “touchstone” of an investment\ncontract “is the presence of an investment in a common venture premised on a reasonable\nexpectation of profits to be derived from the entrepreneurial or managerial efforts of others.”).\nThis definition embodies a “flexible rather than a static principle, one that is capable of\nadaptation to meet the countless and variable schemes devised by those who seek the use of the\nmoney of others on the promise of profits.” Howey, 328 U.S. at 299 (emphasis added). The test\n“permits the fulfillment of the statutory purpose of compelling full and fair disclosure relative to\nthe issuance of ‘the many types of instruments that in our commercial world fall within the\nordinary concept of a security.’” Id. In analyzing whether something is a security, “form should\nbe disregarded for substance,” Tcherepnin v. Knight, 389 U.S. 332, 336 (1967), “and the\nemphasis should be on economic realities underlying a transaction, and not on the name\nappended thereto.” United Housing Found., 421 U.S. at 849.\n2. Investors in The DAO Invested Money\nIn determining whether an investment contract exists, the investment of “money” need\nnot take the form of cash. See, e.g., Uselton v. Comm. Lovelace Motor Freight, Inc., 940 F.2d\n564, 574 (10th Cir. 1991) (“[I]n spite of Howey’s reference to an ‘investment of money,’ it is\nwell established that cash is not the only form of contribution or investment that will create an\ninvestment contract.”).\nInvestors in The DAO used ETH to make their investments, and DAO Tokens were\nreceived in exchange for ETH. Such investment is the type of contribution of value that can\ncreate an investment contract under Howey. See SEC v. Shavers, No. 4:13-CV-416, 2014 WL\n4652121, at *1 (E.D. Tex. Sept. 18, 2014) (holding that an investment of Bitcoin, a virtual\ncurrency, meets the first prong of Howey); Uselton, 940 F.2d at 574 (“[T]he ‘investment’ may\ntake the form of ‘goods and services,’ or some other ‘exchange of value’.”) (citations omitted).\n3. With a Reasonable Expectation of Profits\nInvestors who purchased DAO Tokens were investing in a common enterprise and\nreasonably expected to earn profits through that enterprise when they sent ETH to The DAO’s\nEthereum Blockchain address in exchange for DAO Tokens. “[P]rofits” include “dividends,\nother periodic payments, or the increased value of the investment.” Edwards, 540 U.S. at 394.\nAs described above, the various promotional materials disseminated by Slock.it and its cofounders\ninformed investors that The DAO was a for-profit entity whose objective was to fund \n12\nprojects in exchange for a return on investment.\n35 The ETH was pooled and available to The\nDAO to fund projects. The projects (or “contracts”) would be proposed by Contractors. If the\nproposed contracts were whitelisted by Curators, DAO Token holders could vote on whether The\nDAO should fund the proposed contracts. Depending on the terms of each particular contract,\nDAO Token holders stood to share in potential profits from the contracts. Thus, a reasonable\ninvestor would have been motivated, at least in part, by the prospect of profits on their\ninvestment of ETH in The DAO.\n4. Derived from the Managerial Efforts of Others\na. The Efforts of Slock.it, Slock.it’s Co-Founders, and The DAO’s\nCurators Were Essential to the Enterprise\nInvestors’ profits were to be derived from the managerial efforts of others—specifically,\nSlock.it and its co-founders, and The DAO’s Curators. The central issue is “whether the efforts\nmade by those other than the investor are the undeniably significant ones, those essential\nmanagerial efforts which affect the failure or success of the enterprise.” SEC v. Glenn W. Turner\nEnters., Inc., 474 F.2d 476, 482 (9th Cir. 1973). The DAO’s investors relied on the managerial\nand entrepreneurial efforts of Slock.it and its co-founders, and The DAO’s Curators, to manage\nThe DAO and put forth project proposals that could generate profits for The DAO’s investors.\nInvestors’ expectations were primed by the marketing of The DAO and active\nengagement between Slock.it and its co-founders with The DAO and DAO Token holders. To\nmarket The DAO and DAO Tokens, Slock.it created The DAO Website on which it published\nthe White Paper explaining how a DAO Entity would work and describing their vision for a\nDAO Entity. Slock.it also created and maintained other online forums that it used to provide\ninformation to DAO Token holders about how to vote and perform other tasks related to their\ninvestment. Slock.it appears to have closely monitored these forums, answering questions from\nDAO Token holders about a variety of topics, including the future of The DAO, security\nconcerns, ground rules for how The DAO would work, and the anticipated role of DAO Token\nholders. The creators of The DAO held themselves out to investors as experts in Ethereum, the\nblockchain protocol on which The DAO operated, and told investors that they had selected\npersons to serve as Curators based on their expertise and credentials. Additionally, Slock.it told\ninvestors that it expected to put forth the first substantive profit-making contract proposal—a\nblockchain venture in its area of expertise. Through their conduct and marketing materials,\nSlock.it and its co-founders led investors to believe that they could be relied on to provide the\nsignificant managerial efforts required to make The DAO a success.\nInvestors in The DAO reasonably expected Slock.it and its co-founders, and The DAO’s\nCurators, to provide significant managerial efforts after The DAO’s launch. The expertise of\nThe DAO’s creators and Curators was critical in monitoring the operation of The DAO,\nsafeguarding investor funds, and determining whether proposed contracts should be put for a\n 35 That the “projects” could encompass services and the creation of goods for use by DAO Token holders does not\nchange the core analysis that investors purchased DAO Tokens with the expectation of earning profits from the\nefforts of others.\n13\nvote. Investors had little choice but to rely on their expertise. At the time of the offering, The\nDAO’s protocols had already been pre-determined by Slock.it and its co-founders, including the\ncontrol that could be exercised by the Curators. Slock.it and its co-founders chose the Curators,\nwhose function it was to: (1) vet Contractors; (2) determine whether and when to submit\nproposals for votes; (3) determine the order and frequency of proposals that were submitted for a\nvote; and (4) determine whether to halve the default quorum necessary for a successful vote on\ncertain proposals. Thus, the Curators exercised significant control over the order and frequency\nof proposals, and could impose their own subjective criteria for whether the proposal should be\nwhitelisted for a vote by DAO Token holders. DAO Token holders’ votes were limited to\nproposals whitelisted by the Curators, and, although any DAO Token holder could put forth a\nproposal, each proposal would follow the same protocol, which included vetting and control by\nthe current Curators. While DAO Token holders could put forth proposals to replace a Curator,\nsuch proposals were subject to control by the current Curators, including whitelisting and\napproval of the new address to which the tokens would be directed for such a proposal. In\nessence, Curators had the power to determine whether a proposal to remove a Curator was put to\na vote.\n36\nAnd, Slock.it and its co-founders did, in fact, actively oversee The DAO. They\nmonitored The DAO closely and addressed issues as they arose, proposing a moratorium on all\nproposals until vulnerabilities in The DAO’s code had been addressed and a security expert to\nmonitor potential attacks on The DAO had been appointed. When the Attacker exploited a\nweakness in the code and removed investor funds, Slock.it and its co-founders stepped in to help\nresolve the situation.\nb. DAO Token Holders’ Voting Rights Were Limited\nAlthough DAO Token holders were afforded voting rights, these voting rights were\nlimited. DAO Token holders were substantially reliant on the managerial efforts of Slock.it, its\nco-founders, and the Curators.\n37 Even if an investor’s efforts help to make an enterprise\nprofitable, those efforts do not necessarily equate with a promoter’s significant managerial\nefforts or control over the enterprise. See, e.g., Glenn W. Turner, 474 F.2d at 482 (finding that a\nmulti-level marketing scheme was an investment contract and that investors relied on the\npromoter’s managerial efforts, despite the fact that investors put forth the majority of the labor\nthat made the enterprise profitable, because the promoter dictated the terms and controlled the\nscheme itself); Long v. Shultz, 881 F.2d 129, 137 (5th Cir. 1989) (“An investor may authorize the\nassumption of particular risks that would create the possibility of greater profits or losses but still\ndepend on a third party for all of the essential managerial efforts without which the risk could not\n 36 DAO Token holders could put forth a proposal to split from The DAO, which would result in the creation of a\nnew DAO Entity with a new Curator. Other DAO Token holders would be allowed to join the new DAO Entity as\nlong as they voted yes to the original “split” proposal. Unlike all other contract proposals, a proposal to split did not\nrequire a deposit or a quorum, and it required a seven-day debating period instead of the minimum two-week\ndebating period required for other proposals.\n37 Because, as described above, DAO Token holders were incentivized either to vote yes or to abstain from voting,\nthe results of DAO Token holder voting would not necessarily reflect the actual view of a majority of DAO Token\nholders.\n14\npay off.”). See also generally SEC v. Merchant Capital, LLC, 483 F.3d 747 (11th Cir. 2007)\n(finding an investment contract even where voting rights were provided to purported general\npartners, noting that the voting process provided limited information for investors to make\ninformed decisions, and the purported general partners lacked control over the information in the\nballots).\nThe voting rights afforded DAO Token holders did not provide them with meaningful\ncontrol over the enterprise, because (1) DAO Token holders’ ability to vote for contracts was a\nlargely perfunctory one; and (2) DAO Token holders were widely dispersed and limited in their\nability to communicate with one another.\nFirst, as discussed above, DAO Token holders could only vote on proposals that had been\ncleared by the Curators.38 And that clearance process did not include any mechanism to provide\nDAO Token holders with sufficient information to permit them to make informed voting\ndecisions. Indeed, based on the particular facts concerning The DAO and the few draft proposals\ndiscussed in online forums, there are indications that contract proposals would not have\nnecessarily provide enough information for investors to make an informed voting decision,\naffording them less meaningful control. For example, the sample contract proposal attached to\nthe White Paper included little information concerning the terms of the contract. Also, the\nSlock.it co-founders put forth a draft of their own contract proposal and, in response to questions\nand requests to negotiate the terms of the proposal (posted to a DAO forum), a Slock.it founder\nexplained that the proposal was intentionally vague and that it was, in essence, a take it or leave\nit proposition not subject to negotiation or feedback. See, e.g., SEC v. Shields, 744 F.3d 633,\n643-45 (10th Cir. 2014) (in assessing whether agreements were investment contracts, court\nlooked to whether “the investors actually had the type of control reserved under the agreements\nto obtain access to information necessary to protect, manage, and control their investments at the\ntime they purchased their interests.”).\nSecond, the pseudonymity and dispersion of the DAO Token holders made it difficult for\nthem to join together to effect change or to exercise meaningful control. Investments in The\nDAO were made pseudonymously (such that the real-world identities of investors are not\napparent), and there was great dispersion among those individuals and/or entities who were\ninvested in The DAO and thousands of individuals and/or entities that traded DAO Tokens in the\nsecondary market—an arrangement that bears little resemblance to that of a genuine general\npartnership. Cf. Williamson v. Tucker, 645 F.2d 404, 422-24 (5th Cir. 1981) (“[O]ne would not\nexpect partnership interests sold to large numbers of the general public to provide any real\npartnership control; at some point there would be so many [limited] partners that a partnership\nvote would be more like a corporate vote, each partner’s role having been diluted to the level of a\nsingle shareholder in a corporation.”).39 Slock.it did create and maintain online forums on which\n 38 Because, in part, The DAO never commenced its business operations funding projects, this Report does not\nanalyze the question whether anyone associated with The DAO was an “[i]nvestment adviser” under Section\n202(a)(11) of the Investment Advisers Act of 1940 (“Advisers Act”). See 15 U.S.C. § 80b-2(a)(11). Those who\nwould use virtual organizations should consider their obligations under the Advisers Act.\n39 The Fifth Circuit in Williamson stated that:\n15\ninvestors could submit posts regarding contract proposals, which were not limited to use by\nDAO Token holders (anyone was permitted to post). However, DAO Token holders were\npseudonymous, as were their posts to the forums. Those facts, combined with the sheer number\nof DAO Token holders, potentially made the forums of limited use if investors hoped to\nconsolidate their votes into blocs powerful enough to assert actual control. This was later\ndemonstrated through the fact that DAO Token holders were unable to effectively address the\nAttack without the assistance of Slock.it and others. The DAO Token holders’ pseudonymity\nand dispersion diluted their control over The DAO. See Merchant Capital, 483 F.3d at 758\n(finding geographic dispersion of investors weighing against investor control).\nThese facts diminished the ability of DAO Token holders to exercise meaningful control\nover the enterprise through the voting process, rendering the voting rights of DAO Token holders\nakin to those of a corporate shareholder. Steinhardt Group, Inc. v. Citicorp., 126 F.3d 144, 152\n(3d Cir. 1997) (“It must be emphasized that the assignment of nominal or limited responsibilities\nto the participant does not negate the existence of an investment contract; where the duties\nassigned are so narrowly circumscribed as to involve little real choice of action … a security may\nbe found to exist … . [The] emphasis must be placed on economic reality.”) (citing SEC v.\nKoscot Interplanetary, Inc., 497 F.2d 473, 483 n. 14 (5th Cir. 1974)).\nBy contract and in reality, DAO Token holders relied on the significant managerial\nefforts provided by Slock.it and its co-founders, and The DAO’s Curators, as described above.\nTheir efforts, not those of DAO Token holders, were the “undeniably significant” ones, essential\nto the overall success and profitability of any investment into The DAO. See Glenn W. Turner,\n474 F.2d at 482.\nC. Issuers Must Register Offers and Sales of Securities Unless a Valid Exemption\nApplies\nThe definition of “issuer” is broadly defined to include “every person who issues or\nproposes to issue any security” and “person” includes “any unincorporated organization.” 15\nU.S.C. § 77b(a)(4). The term “issuer” is flexibly construed in the Section 5 context “as issuers\ndevise new ways to issue their securities and the definition of a security itself expands.” Doran\nv. Petroleum Mgmt. Corp., 545 F.2d 893, 909 (5th Cir. 1977); accord SEC v. Murphy, 626 F.2d\n633, 644 (9th Cir. 1980) (“[W]hen a person [or entity] organizes or sponsors the organization of\n\nA general partnership or joint venture interest can be designated a security if the investor can\nestablish, for example, that (1) an agreement among the parties leaves so little power in the hands\nof the partner or venture that the arrangement in fact distributes power as would a limited\npartnership; or (2) the partner or venturer is so inexperienced and unknowledgeable in business\naffairs that he is incapable of intelligently exercising his partnership or venture powers; or (3) the\npartner or venturer is so dependent on some unique entrepreneurial or managerial ability of the\npromoter or manager that he cannot replace the manager of the enterprise or otherwise exercise\nmeaningful partnership or venture powers.\nWilliamson, 645 F.2d at 424 & n.15 (court also noting that, “this is not to say that other factors could not\nalso give rise to such a dependence on the promoter or manager that the exercise of partnership powers\nwould be effectively precluded.”).\n16\nlimited partnerships and is primarily responsible for the success or failure of the venture for\nwhich the partnership is formed, he will be considered an issuer … .”).\nThe DAO, an unincorporated organization, was an issuer of securities, and information\nabout The DAO was “crucial” to the DAO Token holders’ investment decision. See Murphy,\n626 F.2d at 643 (“Here there is no company issuing stock, but instead, a group of individuals\ninvesting funds in an enterprise for profit, and receiving in return an entitlement to a percentage\nof the proceeds of the enterprise.”) (citation omitted). The DAO was “responsible for the\nsuccess or failure of the enterprise,” and accordingly was the entity about which the investors\nneeded information material to their investment decision. Id. at 643-44.\nDuring the Offering Period, The DAO offered and sold DAO Tokens in exchange for\nETH through The DAO Website, which was publicly-accessible, including to individuals in the\nUnited States. During the Offering Period, The DAO sold approximately 1.15 billion DAO\nTokens in exchange for a total of approximately 12 million ETH, which was valued in USD, at\nthe time, at approximately $150 million. Because DAO Tokens were securities, The DAO was\nrequired to register the offer and sale of DAO Tokens, unless a valid exemption from such\nregistration applied.\nMoreover, those who participate in an unregistered offer and sale of securities not subject\nto a valid exemption are liable for violating Section 5. See, e.g., Murphy, 626 F.2d at 650-51\n(“[T]hose who ha[ve] a necessary role in the transaction are held liable as participants.”) (citing\nSEC v. North Am. Research & Dev. Corp., 424 F.2d 63, 81 (2d Cir. 1970); SEC v. Culpepper,\n270 F.2d 241, 247 (2d Cir. 1959); SEC v. International Chem. Dev. Corp., 469 F.2d 20, 28 (10th\nCir. 1972); Pennaluna & Co. v. SEC, 410 F.2d 861, 864 n.1, 868 (9th Cir. 1969)); SEC v.\nSoftpoint, Inc., 958 F. Supp 846, 859-60 (S.D.N.Y. 1997) (“The prohibitions of Section 5 …\nsweep[] broadly to encompass ‘any person’ who participates in the offer or sale of an\nunregistered, non-exempt security.”); SEC v. Chinese Consol. Benevolent Ass’n., 120 F.2d 738,\n740-41 (2d Cir. 1941) (defendant violated Section 5(a) “because it engaged in selling\nunregistered securities” issued by a third party “when it solicited offers to buy the securities ‘for\nvalue’”).\nD. A System that Meets the Definition of an Exchange Must Register as a National\nSecurities Exchange or Operate Pursuant to an Exemption from Such Registration\nSection 5 of the Exchange Act makes it unlawful for any broker, dealer, or exchange,\ndirectly or indirectly, to effect any transaction in a security, or to report any such transaction, in\ninterstate commerce, unless the exchange is registered as a national securities exchange under\nSection 6 of the Exchange Act, or is exempted from such registration. See 15 U.S.C. §78e.\nSection 3(a)(1) of the Exchange Act defines an “exchange” as “any organization, association, or\ngroup of persons, whether incorporated or unincorporated, which constitutes, maintains, or\nprovides a market place or facilities for bringing together purchasers and sellers of securities or\nfor otherwise performing with respect to securities the functions commonly performed by a stock\nexchange as that term is generally understood … .” 15 U.S.C. § 78c(a)(1).\nExchange Act Rule 3b-16(a) provides a functional test to assess whether a trading system\nmeets the definition of exchange under Section 3(a)(1). Under Exchange Act Rule 3b-16(a), an \n17\norganization, association, or group of persons shall be considered to constitute, maintain, or\nprovide “a marketplace or facilities for bringing together purchasers and sellers of securities or\nfor otherwise performing with respect to securities the functions commonly performed by a stock\nexchange,” if such organization, association, or group of persons: (1) brings together the orders\nfor securities of multiple buyers and sellers; and (2) uses established, non-discretionary methods\n(whether by providing a trading facility or by setting rules) under which such orders interact with\neach other, and the buyers and sellers entering such orders agree to the terms of the trade.40\nA system that meets the criteria of Rule 3b-16(a), and is not excluded under Rule 3b16(b),\nmust register as a national securities exchange pursuant to Sections 5 and 6 of the\nExchange Act\n41 or operate pursuant to an appropriate exemption. One frequently used\nexemption is for alternative trading systems (“ATS”).42 Rule 3a1-1(a)(2) exempts from the\ndefinition of “exchange” under Section 3(a)(1) an ATS that complies with Regulation ATS,43\nwhich includes, among other things, the requirement to register as a broker-dealer and file a\nForm ATS with the Commission to provide notice of the ATS’s operations. Therefore, an ATS\nthat operates pursuant to the Rule 3a1-1(a)(2) exemption and complies with Regulation ATS\nwould not be subject to the registration requirement of Section 5 of the Exchange Act.\nThe Platforms that traded DAO Tokens appear to have satisfied the criteria of Rule 3b16(a)\nand do not appear to have been excluded from Rule 3b-16(b). As described above, the\nPlatforms provided users with an electronic system that matched orders from multiple parties to\nbuy and sell DAO Tokens for execution based on non-discretionary methods\n\nConclusion and References for Additional Guidance\nWhether or not a particular transaction involves the offer and sale of a security—\nregardless of the terminology used—will depend on the facts and circumstances, including the\n 40 See 17 C.F.R. § 240.3b-16(a). The Commission adopted Rule 3b-16(b) to exclude explicitly certain systems that\nthe Commission believed did not meet the exchange definition. These systems include systems that merely route\norders to other execution facilities and systems that allow persons to enter orders for execution against the bids and\noffers of a single dealer system. See Securities Exchange Act Rel. No. 40760 (Dec. 8, 1998), 63 FR 70844 (Dec. 22,\n1998) (Regulation of Exchanges and Alternative Trading Systems) (“Regulation ATS”), 70852.\n41 15 U.S.C. § 78e. A “national securities exchange” is an exchange registered as such under Section 6 of the\nExchange Act. 15 U.S.C. § 78f.\n42 Rule 300(a) of Regulation ATS promulgated under the Exchange Act provides that an ATS is:\nany organization, association, person, group of persons, or system: (1) [t]hat constitutes,\nmaintains, or provides a market place or facilities for bringing together purchasers and sellers of\nsecurities or for otherwise performing with respect to securities the functions commonly\nperformed by a stock exchange within the meaning of [Exchange Act Rule 3b-16]; and (2) [t]hat\ndoes not: (i) [s]et rules governing the conduct of subscribers other than the conduct of subscribers’\ntrading on such [ATS]; or (ii) [d]iscipline subscribers other than by exclusion from trading.\nRegulation ATS, supra note 40, Rule 300(a).\n43 See 17 C.F.R. § 240.3a1-1(a)(2). Rule 3a1-1 also provides two other exemptions from the definition of\n“exchange” for any ATS operated by a national securities association, and any ATS not required to comply with\nRegulation ATS pursuant to Rule 301(a) of Regulation ATS. See 17 C.F.R. §§ 240.3a1-1(a)(1) and (3).\n18\neconomic realities of the transaction. Those who offer and sell securities in the United States\nmust comply with the federal securities laws, including the requirement to register with the\nCommission or to qualify for an exemption from the registration requirements of the federal\nsecurities laws. The registration requirements are designed to provide investors with procedural\nprotections and material information necessary to make informed investment decisions. These\nrequirements apply to those who offer and sell securities in the United States, regardless whether\nthe issuing entity is a traditional company or a decentralized autonomous organization,\nregardless whether those securities are purchased using U.S. dollars or virtual currencies, and\nregardless whether they are distributed in certificated form or through distributed ledger\ntechnology. In addition, any entity or person engaging in the activities of an exchange, such as\nbringing together the orders for securities of multiple buyers and sellers using established nondiscretionary\nmethods under which such orders interact with each other and buyers and sellers\nentering such orders agree upon the terms of the trade, must register as a national securities\nexchange or operate pursuant to an exemption from such registration.\nTo learn more about registration requirements under the Securities Act, please visit the\nCommission’s website here. To learn more about the Commission’s registration requirements\nfor investment companies, please visit the Commission’s website here. To learn more about the\nCommission’s registration requirements for national securities exchanges, please visit the\nCommission’s website here. To learn more about alternative trading systems, please see the\nRegulation ATS adopting release here.\nFor additional guidance, please see the following Commission enforcement actions\ninvolving virtual currencies:\n• SEC v. Trendon T. Shavers and Bitcoin Savings and Trust, Civil Action No. 4:13-\nCV-416 (E.D. Tex., complaint filed July 23, 2013)\n• In re Erik T. Voorhees, Rel. No. 33-9592 (June 3, 2014)\n• In re BTC Trading, Corp. and Ethan Burnside, Rel. No. 33-9685 (Dec. 8, 2014)\n• SEC v. Homero Joshua Garza, Gaw Miners, LLC, and ZenMiner, LLC (d/b/a Zen\nCloud), Civil Action No. 3:15-CV-01760 (D. Conn., complaint filed Dec. 1,\n2015)\n• In re Bitcoin Investment Trust and SecondMarket, Inc., Rel. No. 34-78282 (July\n11, 2016)\n• In re Sunshine Capital, Inc., File No. 500-1 (Apr. 11, 2017)\nAnd please see the following investor alerts:\n• Bitcoin and Other Virtual Currency-Related Investments (May 7, 2014)\n• Ponzi Schemes Using Virtual Currencies (July 2013)\nBy the Commission",
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      "title": "SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 81207 / July 25, 2017 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO"
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