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SEC and ICO’s not the end of the story

July 28, 2017

OK.  One problem with the SEC discussion of DAO’s is that people want to take a 20 page document and simplify that into one sentence.  So it ends up “SEC says ICO’s are securities, world is doomed.”  The problem is that SEC regulatory guidance aren’t tweets.  One way of looking at it is that SEC guidance are like code.  Trying to summarize an SEC document in one sentence is like trying to summarize Microsoft Excel in one sentence, you really can’t.  Because it’s not a tweet.  It’s a computer program.

So what the SEC basically said was:

is_security(DAO) = true

But one thing is what happens next.  So one thing that the SEC said was that if this is a security, then generally speaking, you have to register it before you can sell it.  The thing is that “generally speaking” means that there are exceptions, and the obvious exception is Regulation S.  Regulation S is a provision of the US security regulations that says that certain offshore securities do not have to be registered in the US.  It’s a really long and messy regulation, but it looks to me like the DAO would fall under that exemption.

Here is a summary of Regulation S

So we go through Rule 903:

The DAO was offered and sold in an offshore transaction.  There was no directed selling in the United States.

So the next step is to look at the additional conditions.  And it looks like the DAO falls under Category 1.  So even though the DAO is a security, it looks pretty clear to me that it falls under an Regulation S exemption and that no registration is required.

Now suppose it in fact is subject to SEC registration.  There is an interesting hack that might address that.  The SEC just requires registration.  So you file registration papers with the SEC that says that you guarantee nothing, and the securities you are issuing may in fact be totally worthless.  At that point anyone that looks up the securities registration has fair warning that you might be taking their money and getting nothing in return.


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