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SEC: Blockchain Doesn't Exempt Company From Securities Regs

By George Khoury, Esq. on July 28, 2017 | Last updated on March 21, 2019

One company is thanking their lucky digital stars after the recent ruling from SEC clearly stated that the oversight organization would not be pursuing an enforcement action against it, despite the company running afoul of securities regulations.

The DAO, known for its unique crypto currency, Etherium, took the idea of anonymous payments one step further by extending it to anonymous smart contracts. The company's name stands for Decentralized Autonomous Organization, and the idea behind it involves the holders of the DAO's currency, or tokens, profiting based on projects performed by individuals. However, unlike other virtual token systems that have emerged over the past few years, the SEC found the DAO to be bit different.

What's a Blockchain?

Though it sounds just as inaccessible as any other tech term, a blockchain is basically just a transaction log. For every transaction, a new block is made. Each block is a transaction. Each block also contains a link to the transaction that happened immediately before it, thus chaining the blocks together. This allows all transactions, and thus all the currency, to be accounted for, and reduces the potential for fraud, and most significantly, double spending.

When Virtual Tokens Are Real Securities

Tokens on the DAO were purchased using other crypto currencies or using fiat money. As the SEC explained, holders of the tokens bought in with the expectation of receiving some form of return, like dividends from a stock. Additionally, the holders could trade, or sell, their tokens on various platforms. This separated the DAO from other virtual coin sellers that did not allow users to do anything with their coins besides purchase services on the site.

However, the SEC, recognizing that these areas of law and technology are new and rather nuanced, found this case to be a good opportunity to educate other virtual coin and currency sellers about their responsibilities when selling securities.

Can't Blockchain the Pain Away

Blockchain may be the wave of the future, and allow anyone the ability to see all transactions of a particular virtual currency, but it's no magic school bus ride out of the reality of SEC regulation. When offering securities for sale, a company must comply with the SEC's full and fair disclosure requirements. These disclosures include more than just info about the transaction being offered, but also information about a company's management, financial history, and more.

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