No blockchain phenomenon has garnered more attention lately than Initial Coin Offerings (“ICOs”), which have exploded in value and raised more than $1.2 billion thus far this year.
In a typical ICO, a blockchain-based product or service provider offers proprietary digital assets (“tokens”) – rather than traditional forms of debt or equity – in exchange for working capital, usually provided in the form of a cryptocurrency such as Bitcoin or Ether (“ETH”).
One of the first truly significant ICOs was carried out by a platform called The DAO, an attempt by an entity known as Slock.it to build a “decentralized autonomous organization.” Over the span of about a month in May 2016, The DAO’s ICO raised about 12 million ETH — the equivalent of approximately $150 million.
Last week, the Securities and Exchange Commission released a report of investigation regarding potential federal securities law violations involving The DAO and related entities. Although it determined not to pursue enforcement action, its report stated that the digital tokens issued by The DAO in its ICO qualify as securities under the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC found that the DAO Tokens are securities because they constitute an “investment contract” under the federal securities laws.