SEC offers Comeyesque explaination why it took no action against the DAO ICO

The SEC lays out case against the Decentralized Autonomous Organization Inititial Coin Offering – declines to act.

SEC labels the DAO tokens “securities” that would by law require to be registered, but weren’t.

SEC uses its findings re the DAO as a teachable moment to warn the ICO industry.

The SEC Lays Out the Case Against DAO ICO But Warns Industry

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The big news yesterday was “the SEC is cracking down on ICO’s” A closer look at the SEC press release and report of investigation reveals otherwise.

The U.S. Securities Exchange Commission (SEC) noted yesterday “Those who offer and sell securities in the United States must comply with the federal securities laws, including the requirement to register with the Commission or to qualify for an exemption from the registration requirements of the federal securities laws.”

The foregoing language does not reflect a new tough stance the SEC is taking against Initial Coin Offerings (ICOs). Rather, it a terse restatement of U.S. securities laws in place since the Securities Act of 1933 was enacted.

Most of the reporting to date has focused on the finding of the SEC that the tokens in the Decentralized Autonomous Organization (DAO) ICO were securities.

In the SEC report of investigation released yesterday, the SEC concluded

DAO Tokens Are Securities

1. Foundational Principles of the Securities Laws Apply to Virtual
Organizations or Capital Raising Entities Making Use of Distributed
Ledger Technology
2. Investors in The DAO Invested Money
3. With a Reasonable Expectation of Profits
4. Derived from the Managerial Efforts of Others

As such the SEC noted regarding issuers of securities:

Issuers Must Register Offers and Sales of Securities Unless a Valid Exemption
Applies UG, the German corporation that sponsored The DAO’s issuance of tokens did NOT registered the securities and did not claim an exemption.

The SEC, having laid out the case that the DAO tokens WERE securities and having noted that securities MUST be registered, the SEC concluded:

“In light of the facts and circumstances, the agency has decided not to bring charges in this instance, or make findings of violations in the Report, but rather to caution the industry and market participants”

If you re-read the SEC report of investigation they clearly did make a finding of a violation- the deemed the DAO to be securities that were required to be registered and weren’t.

COMEY on Clinton

Former FBI Director James Comey followed a path similiar to the one the SEC trod yesterday. In the FBI’s investigation of Hillary Clinton’s use of a private email server in her official capacity as Secretary of State, James Comey enumerated all times Hillary Clinton mishandled classified information and concluded in a press conference:

We cannot find a case that would support bringing criminal charges on these facts. All the cases prosecuted involved some combination of: clearly intentional and willful mishandling of classified information; or vast quantities of materials exposed in such a way as to support an inference of intentional misconduct; or indications of disloyalty to the United States; or efforts to obstruct justice. We do not see those things here.

The Warning:

To be clear, this is not to suggest that in similar circumstances, a person who engaged in this activity would face no consequences. To the contrary, those individuals are often subject to security or administrative sanctions. But that is not what we are deciding now.

Comey’s reasoning for not bringing crimminal charges against Ms. Clinton was based on her lack of intent (somethint the relevant statute does not require). In contrast, the SEC offer NO exculpatory reasons for not bringing an action against UG and The DAO, rather concluding that they would be using the opportunity to “caution the industry”.

Yesterday in our initial report on the SEC action involving the DAO token sale, we noted

“Perhaps the SEC took this seemingly contradictory point of view because it was not certain that a court would agree with their determination that the DAO tokens were securities.”

A finding by a court that the DAO tokens were NOT securities would inspire other ICO issuers to struture their ICOs in exactly the same way as the DAO had done so as to avoid the SEC registration requirements and oversight.

We also noted yesterday:

ICOs Are a Threat to Silicon Valley and Wall Street

The initial public offering process is a cash cow for Silicon Valley venture capital (VC) firms and Wall Street bankers and lawyers. The VCs and bankers control which companies go public and receive vast amounts of capital in the process, while making great fortunes themselves acting as gatekeepers. Unregualted ICOs are an existential threat to the IPO market as they by pass Silicon Valley and Wall Street completely.

If ICO’s are not subject to SEC oversight, they may continue unabated and the nominal value raised in such offering continue to grow exponentially. Rather then bring an enforcement action, which the SEC declined to do so today, they may ask Congress to give it broader authority to regulate ICOs specifically. If the SEC gains regulatory control of ICOs, then too will the bankers, VCs and their lawyers who currently lead IPOs.

Longer term, such a regulatory structure may bring even more money in to the cryptocurrency space.”

It appears that the SEC does not want to stop innovation in the crypto currency space. Much money will be made in cryptocurrencies and nothing would please Silicon Valley venture capitalists and Wall Street Banks than a highly regulated ICO market that they can dominate as they currently do the initial public offering market.

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