ANALYSIS: In DAO v. Bureaucratic Formalities, Bureaucracy Wins

The SEC successfully suspended decentralized autonomous organization American CryptoFed DAO LLC from registering its Locke governance token and Ducat transactional token last month. The organization would tell you that it’s in a “regulatory Catch-22”: It must register but is prevented from registering. However, the DAO’s predicament is of its own making.

The alternative currency effort got it mostly right. The organization registered as a Wyoming LLC, preventing the liability faced by token holders in bZx DAO or Ooki DAO. It even had the foresight to worry that its tokens could be considered securities by the Securities and Exchange Commission.

But, knowing that, the DAO had two paths: It could have complied with SEC registration requirements—as much “square peg into round hole” as they might be—given its operational model. Recently, the SEC-approved crypto broker-dealer Prometheum Ember Capital took that route. Or American CryptoFed could have petitioned for an SEC rule exempting it from some or all registration requirements and sued if denied. Coinbase attempted this strategy, although Coinbase’s continued operation while challenging the SEC’s lack of rulemaking earned the company an SEC suit.

Proceeding without counsel, American CryptoFed tried to have it both ways by filing a registration intentionally omitting financial statements and by filing a legal opinion on the basis that the tokens weren’t really securities.

When the SEC staff repeatedly pointed out that registration is for securities that follow the rules (i.e., including financial statements), and petitions for rulemaking are for exemptions, the DAO’s principals reiterated that the tokens weren’t actually securities—but didn’t provide the financial statements.

Subpoenas, a deposition, a multiday administrative hearing, and finally a stop order followed. Administrative Law Judge Carol Fox Foelak repeated the statements of the SEC staff: If you file a securities registration, it has to follow the rules. To get a determination that a token isn’t a security is a different process.

American CryptoFed (again without counsel) filed a “motion to correct a manifest error of fact” on May 29, which was denied June 6. It plans to petition for a review of the stop order, according to its website.

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