The DAO Report: Understanding the risks of SEC enforcement actions (full report download)


nnnRaiders Comment: Recently the SEC issued a report on the DAO triggered a hot debate, the community a refreshing. Jason Somensatto, a lawyer at Morvillo LLP, also discussed the impact of the ruling on the use of the chain-chain tokens and argued that entrepreneurs should not ignore the legal risks posed by SEC’s law enforcement actions. This article focuses on whether the tokens are or should be regarded as securities and are subject to legal issues in US legal regulation. They analyze the risks of SEC enforcement actions to ICO developers and think that developers should consult with lawyers before launching ICO, To avoid risks.n
nnTranslation: Clovern
nJason Somensatto is a lawyer at Morvillo LL.HK, whose main business areas include internal investigations, government enforcement actions and white-collar crime.n
nIn this review article, Somensatto explores the impact of the new SEC ruling on the use of block-based tokens, and argues that entrepreneurs should not ignore their legal risks.n
nJust three years ago, I wrote an article about the potential legal impact of coin-selling money on coin money.n
nnConcerned about the WeChat public number “block chain pencil Blockchain”, reply to the keyword “SEC”, you can view the full report.n

nAt that time, as a lawyer, I spent most of my time standing on the opposite side of the SEC, defending the case of US securities law, and I wrote from the lawyer’s point of view that I wanted to give the newborn initial digital currency ICO) industry to provide some warning.n
nSince then, the ICO market has expanded rapidly, and ICO has become a common, seemingly lucrative way to fund new de-centric applications such as Tezos and Bancor. With the development of the ICO market, the discussion of its legal significance is also increasing.n
nThe main question that has been under discussion is whether the token is or should be regarded as securities and subject to US law. The answer to this question is important because the regulation of the sale of regulated securities in the United States is very strict, such as requiring a detailed listing of securities to apply for listing or only to the so-called trusted investors.n
nThis week, the SEC issued a report, which for the first time argued that the sale of distributed classified books tokens constitutes an unlawful sale of unregistered securities, which would have caused the problem to be unresolved. This article is not intended to analyze the SEC’s report, because it is clear at a glance, and there will be a lot of people will carefully analyze their wording.n
nOn the contrary, the purpose of this article is to explain the risks of potential SEC enforcement actions that are to be faced by developers who do ICOs without considering US securities laws.n
nSo far, almost every ICO project has considered it to be a token. And for developers who continue to hold this position, it is important to understand the risks they bear and how the question of whether a token is a security in any particular case will be determined.n
nAlthough the report indicates whether the specific tokens are considered to be a kind of securities, the problem is to be analyzed on a case-by-case basis, as well as by taking extraordinary measures, and the report clearly points to the sale of the distributed taxonomy tokens to raise Other people of funds, effectively attracted the attention of the entire industry.n
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nSEC law enforcement processn
nAssuming we will see more ICOs under review by the SEC, need to go through SEC investigations and potential enforcement actions, then ICO developers must understand how long the SEC investigation will take and how boring it will be Then
nIf you expect the SEC to give a quick comment after a brief investigation, then you are wrong. Most surveys take months (usually over a year) and involve a lot of documentation requirements, interrogating countless witnesses and extensive consultations on allegations and potential reconciliation.n
nDuring the investigation, the main job of the SEC was to try to collect facts to determine whether a violation of the securities laws had occurred and to decide whether or not to initiate enforcement action. As reflected in the report’s findings on The DAO, the SEC will do its utmost to understand all aspects of the relevant conduct and will analyze all the comments made by the ICO developer and then post a position.n
nAt the end of the investigation, if the problem has not yet been resolved, the SEC may choose to take formal enforcement action through internal administrative proceedings or civil proceedings in the federal court. Is expected to be formally heard before a judge or jury, and therefore may be applied to a certain extent, the traditional evidence discovery and presentation process, so it may be possible to add a round of preparation documents, written testimony and motion.n
nIn the end, the offense of criminalization is subject to a decision at a hearing or trial after a few years of occurrence of the act under consideration.n
nIn order to fully understand the inconvenience of this process and the cost of the cost, there is little need to emphasize that my company is back to more than five years before the transaction in the SEC’s law enforcement operations on behalf of multiple customers.n
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nLegal issues can be determinedn
nIn addition to the absolute length, cost, and diffusion capacity required by SEC enforcement actions, developers should consider how their decisions can be determined if their tokens are not securities.n
nDuring the initial survey, there is an opportunity to present important legal arguments and are usually submitted in writing. However, the readers of these arguments are usually law enforcement officers of the law enforcement officers or their superiors.n
nThese lawyers tend to interpret the facts in a way that allows them to sue because of the nature of their posts. While some lawyers may have no preconceived legal arguments during the investigation, given the recently published report on The DAO tokens, there is no pre-set position on the argument that a particular token is not in favor of a particular token , These law enforcement lawyers seem to have no investigation.n
nOn the contrary, it should be assumed that the staff will be strongly disgusted with the argument, or that the position, such a difficult legal issues left to the judge or jury to make a decision.n
nEven if the SEC does not have a strong argument against securities law, the SEC does not intervene in the investigation of tokens, but unlike the case of The DAO, the decision will not be made public and will not be a precedent to show that future securities will not Constitute a securities issue.n
nSo, even if the first development team successfully avoided the SEC’s formal allegations, it does not mean that the risk of other teams facing the investigation will disappear.n
nMost of the people who may face formal allegations from the SEC can eventually settle out before the lawsuit. If a settlement is reached, the SEC will ask the public to issue a resolution stating the position of the SEC, similar to the published The DAO survey.n
nAlthough the views of the allegations on the content and the wording of the court will also provide some advice, the document is written from the SEC’s perspective and in a way that implies a conciliatory approach. The only way to confirm a contradictory position is usually to issue a brief statement stating that the wrongdoer does not recognize or deny the allegations in the order.n
nIn the context of the ICO enforcement action, this means that any settlement can be said that the tokens offer the sale of unregistered securities illegally.n
nAssuming that the developer is adequately funded, or is confident of the final judgment, and therefore chooses to sue the SEC without conciliation, then as part of the formal action, there is a legal question about whether the coin is actually a security To reach a resolution.n
nAt this point, then the SEC will hire an administrative judge or federal judge, or a jury, who does not have any central application background or ICO basics, or the jury to decide the problem. The SEC, with sufficient evidence, will provide a variety of justifications to prove why the $ 5 million raised from US investors to fund a new file-sharing process that looks much like the DAO tokens and the removal of technical terms After the SEC is much like other financing behavior.n
nFrankly, your legal argument looks weaker in the context of how it will actually decide to be compared to a skilled lawyer who invests heavily in numerous ICO projects.n
nThis generalization does not mean that the dispute with the SEC on this issue is doomed to fail. However, the developer must understand whether the decision on whether the token is a security is likely to be available after a few months of investigation, but also between the lawyers to travel, and there may be By a person who is not familiar with the distributed class books.n
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nConsult a lawyer before launching ICOn
nThis raises a question that is quick to discuss: if you are considering launching an ICO, it is important to consult a lawyer.n
nLawyers can not only help you reduce the risk of breaking the law, in fact, if the SEC does proceed with the investigation, relying on the views of lawyers can also help you avoid being accused.n
nHaving said that, it is necessary to be wary of any lawyer who gives you a comprehensive opinion that can easily organize the ICO to avoid the precedence set out in the Securities Act and this week’s report. This attitude is too naive, that he did not understand the impact of the SEC report and the operation of securities law.n
nOn the contrary, before providing any advice or advice, a good lawyer would like to know all the information about your project and may try to make some changes to ensure that it complies with the securities laws.n
nThe influential people in the community have already expressed the opinion that other ICOs should be able to avoid the fate of The DAO, and I have even written some of the different characteristics of distributed classified books tokens and traditional securities.n
nHowever, at this stage, if anyone claims to be able to build an ICO without compromising the risk of being reviewed by the SEC, the developer will be vigilant.n
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nFuture outlookn
nThe fundamental risk that must be taken into account when planning an ICO is that the potential SEC enforcement risk in this new area will not form a precedent for ease of use.n
nThe SEC made it clear in the DAO report that its findings were only intended to be of concern to the industry.n
nSo I am very skeptical that this is probably the last time I have heard the SEC comment on the issue, and I look forward to future law enforcement actions aimed at those who continue to finance through ICO.n
nDevelopers should understand the risks of such a strategy and how to solve such problems, rather than rush to finance and eventually into the SEC’s regulatory scope.n

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