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  • L Hickey and S Pettigrove

SEC sues Wyoming registered DAO

On 18 November the US SEC announced that it has initiated administrative proceedings against American CryptoFed DAO LLC (CryptoFed), a Wyoming based decentralised autonomous organisation. The proceedings are to determine whether a stop order should be issued to suspend the registration of the offer and sale of two crypto assets, the Ducat token and the Locke token.

David Hirsch, Chief of the Enforcement Division’s Crypto Assets and Cyber Unit, said that:

An issuer seeking to register the offer and sale of crypto assets as securities transactions must furnish the required disclosure information to the SEC.

The SEC alleges that on 17 September 2021, CryptoFed filed a Form S-1 registration statement that did not contain information required about their business, management, and financial condition, such as audited financial statements.

David Hirsch, noted that:

American CryptoFed not only failed to comply with the disclosure requirements of the federal securities laws, but it also claimed that the securities transactions they seek to register are not in fact securities transactions at all.

The SEC allege, the Form S-1 registration statement contained materially misleading statements and omissions, including inconsistent statements about whether the tokens are in fact securities under US law. The SEC further alleges that when examined about their registration statement, CryptoFed failed to cooperate.

The COO of CryptoFed, Xiaomeng Zhou, said he rejected the SEC’s claims, arguing that:

Section 8(b) of the Securities Act of 1933 only allows the SEC to issue a Refusal Order to provide further clear guidance for American CryptoFed DAO to complete the Form S-1 registration (not Stop Order)… As a result, the SEC abused the Securities Act of 1933 to unlawfully delay, stop and obstruct American CryptoFed DAO’s legitimate disclosure through the Form S-1 Registration Statement.

In July 2021, CryptoFed claimed to be the first ever DAO to be characterised as a legal entity in the US. In September this year, the Commodity Futures Trading Commission (CFTC) sued OoKi DAO for allegedly offering margined and leveraged trading products without first registering as a futures commission merchant or having any sufficient KYC processes. The CFTC had previously settled with bZeroX, the DAO's predecessor, and the company's directors.

These proceeding against CryptoFed, is the first ever action by a regulator against a registered decentralised autonomous organisation registered in Wyoming under their world leading company DAO laws.


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