SEC halts token registration of America’s first legal DAO

The U.S. Securities and Exchange commission halted the token registration of American CryptoFED, the first legally recognized decentralized autonomous organization in the U.S.

Fast facts

• Wyoming-based American CryptoFED became the first DAO in the U.S. to achieve legal status in July after Wyoming passed a law that recognized DAOs as limited liability companies. A DAO can be likened to a company whose rules are encoded in smart contracts that execute themselves upon meeting requirements without the need for an intermediary.
• On Sept. 16, American CryptoFED filed with the SEC to register its two tokens — Ducat and Locke — as digital securities. CryptoFED claims that Ducat is an inflation- and deflation-proof stablecoin controlled by an algorithm that creates and destroys tokens according to inflation and deflation measured by the personal consumption expenditure index issued by the Commerce Department. Locke, on the other hand, is a governance token with limited supply that is used to stabilize the Ducat and for holders to participate in network decision-making. 

• The Enforcement Division of the SEC found that the filing lacked required information about the two tokens and about American CryptoFed’s business, management, and financial condition, including audited financial statements. The Enforcement Division also stated that the filing contained “materially misleading statements and omissions,” including inconsistent statements about whether Ducat and Locke tokens are securities. Moreover, the statements relating to American CryptoFED’s intention to distribute its Locke token to the public were also found to be misleading. This is because the company intended to distribute Locke to the public as per Form S-8 — a registration form that is only used for securities distributed to employees under employee benefit plans.

• “Issuers attempting to raise money from the public must provide the information necessary for investors to make informed decisions,” said Kristina Littman, chief of the SEC Enforcement Division’s Cyber Unit.  “We allege American CryptoFed made materially misleading statements and failed to provide legally required information in its registration form.” The SEC will carry out administrative proceedings to determine whether to suspend or deny the effective registration date of Ducat and Locke. The decision will be taken by an administrative law judge keeping in mind the protection of investor interest.

• Prior to Wednesday’s notice, the SEC asked American CryptoFED to withdraw its filings, according to a report by Capital.com. According to the report, the SEC wrote in an email dated Oct. 8 to CryptoFED: “We will not perform a detailed examination of the filing, and we will not issue comments on the filing at this time. We suggest that you consider filing a substantive amendment to correct the deficiencies.”