SEC Ruling on the DAO and ICO, Explained
- Andrew Tarasov
- JUL 27, 2017
On July 25, The Securities and Exchanges Commission declared that Blockchain companies must obey federal laws.
On July 25, the SEC made a report that offers and sales of digital assets by "virtual" organizations are subject to the requirements of the federal securities laws. Such offers and sales, conducted by organizations using distributed ledger or Blockchain technology, have been referred to, among other things, as "Initial Coin Offerings" or "Token Sales." The Report confirms that issuers of distributed ledger or Blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies. It also concludes that the DAO tokens were, in fact, securities and, therefore, “subject to federal law.”
It is all due to The DAO incident.
The DAO was a decentralized venture fund based on Ethereum. In April 2016, the ICO raised about $150 mln in ETH. More than 11,000 people invested in this project. But in June, just two months after, some hackers exploited the code problems and stole about $60 mln. Consequently, a lot of people ended up with nothing.
The ICO phenomenon itself has got a lot of criticism, as many believe it’s just an unregulated way to raise money. Well, it has been.
This incident proved the rules and laws should be developed and implemented, according to the SEC. That is why they investigated the case. The full report can be found here.
Top five cryptocurrencies fell in price on the day of the SEC announcement, although it wasn’t dramatic. Ethereum went down about 10 percent, but soon returned to its previous value. It might have been the result of market volatility rather than the SEC news as such.
As for the community, the reactions have split. Some expressed very optimistic points of view, as they feared this area wasn’t given much attention before.
Others feel this contradicts the very concept of decentralization itself.
The SEC's announcement yesterday will have broad and far-reaching effects just like FinCEN's 2013 guidance has had— Brian Klein (@brianeklein) July 26, 2017
Regulators aren’t going away – and shouldn’t. For generations, they have protected from fraud (some is happening w/ the ICO market)— Brad Garlinghouse (@bgarlinghouse) July 26, 2017
Call this what it is: A bunch of strangers in a far off land threatening peaceful people all over the world with violence if they don't obey https://t.co/WQxsAe4e67— Roger Ver (@rogerkver) July 26, 2017
It’s hard to tell for now.
The report urges companies to register with the SEC. In some cases, if a token is not a security, but instead has an actual utility, the ICO may not have to register with the SEC then, since that would not necessarily be considered an "investment."
Also, the registration can give more legitimacy for Blockchain companies. The SEC has strong regulations, so if the company is registered, it would mean it has serious intentions. Experts from the SEC are ready to analyze Blockchain projects and try to reduce the number of possible Ponzi schemes. In addition, it may decrease price leaps and scare off a lot of profiteers.
On the other hand, the number of startups can go down. Not all companies are capable of complying with the SEC rules. Despite a great idea, an experienced team, excellent planning, some projects can never see a light of day.
The question is will this decision affect the whole ICO market or just the US?
Follow Cointelegraph news for more updates on the issue.