Rise New York + Cooley: About SEC’s Conclusion on DAO’s Token being Securities

Patrick, Andy, and Marco from Cooley @ Rise New York’s Conference Room

I happened to be in New York last week for some meetings and got the chance to sneak into this small event hosted by Rise New York with the collaboration of Barclays. Cooley was invited to give a talk about cryptocurrencies, fintech, and a glimpse into the regulatory landscape. As many of you know, on the 25th of July, the SEC (US Securities and Exchange Commission) released their conclusion that DAO Tokens were as securities, and it was kinda expected for the speakers to talk about it.

To be honest, I did not know about Cooley at all until the event. After reading and summarising, they are a law-firm headquartered in Silicon Valley and offer services to many industries: from healthcare to fintech (apparently, they have a department specialised in cryptocurrencies and ICOs).

Introduction to Crypto, Delaware Blockchain Initiative, Tokens & ICOs

Just like almost every talk I’ve been so far, the speakers introduced themselves (Marco Santori, Andy Roth, and Patrick Murck) and then made an (rather long) introduction to Bitcoin and blockchains. If you’d like more details about it, check out the slides I’m posting at the bottom of this page.

However, during the introduction I did learn something I’ve never heard before: the Delaware Blockchain Initiative.

The initiative will allow for the application of distributed ledger technology to many of the private sector’s most basic and critical legal documents, which companies currently file with the Delaware Division of Corporations. — Tinianow & Long, March 2017

And of course, they had to talk about tokens and ICOs, they mentioned 6 of them: Augur, Cøsmos (Tendermint), Steemit, Numerai, Filecoin, and Colony. I wanted to, but did not get the chance to ask why they had to mentioned these 6 specifically.

SEC’s Decision, the Howey Test, and the SAFT Project

Why are DAO tokens considered securities? Because they passed the Howey Test, which was created to determine which transactions should be qualified as investment contracts. The Howey Test defines securities as: An investment of money in a common enteprise with the expectation of profit from the efforts of others. When certain assets pass the test, it means that they have to abide to the regulations on securities (tradable financial assets).

The SEC’s Report of Investigation found that tokens offered and sold by a “virtual” organization known as “The DAO” were securities and therefore subject to the federal securities laws. — SEC Press Release, July 2017

It is not surprising that these news created confusion and some panic among ICOs contributors. When having to abide to the federal securities laws, a grosso modo, it means that organisations that issue these crowdsales are responsible for registering the offers, sales, and investors. As the SEC argues, the purpose of this ruling is to protect investors from fraudulent assets. At the same time, it means that you must be an investor to participate in these token sales. In contrast to what was mentioned in my previous article: the average Joe is participating in these sales without having any knowledge about the technology or product (sometimes because some ICOs do not provide white papers or open-source their code base).

Before SEC’s the decision, and still now, the regulatory landscape of tokens appears to be volatile, and it’s not surprising that many organisations behind ICOs have actively avoided contributors with a US IP address. Furthermore, it encourages initiatives such as the SAFT (or SAFTE) project to emerge. It stands for Simple Agreement for Future Tokens (or Equity), and it is a contract that safeguards token buying. I found the template for SAFTE here. There are some considerations deriving from the project:

  1. If you want to sell tokens, you must sell a SAFTE to accredited investors
  2. Take their money! — Marco Santori
  3. Develop tokens that work* and create value
  4. Deliver tokens to investors, who can then resell to the public, and they will know how to do it properly

*Although, it seems really obvious, not all the organisations behind ICOs are transparent about the research, product they’re developing or the roadmap.

Thanks for reading so far! I hope it was useful, I will do some research on some ICO’s response to SEC’s ruling. Stay tunned ❤


Important: I DO NOT own these slides, I was given the paper copies when I was at the event. Sorry for the bad quality and I agree, they could’ve made much prettier slides!