The U.S. Securities and Exchange Commission (SEC) today stopped the first legally recognized decentralized autonomous organization in the country from registering its crypto tokens as securities—alleging it put out “misleading information” to would-be investors.
American CryptoFed DAO LLC in September filed a Form 10 with the SEC, which is used for registering securities for trading on U.S. exchanges. But according to the SEC, the form did not have sufficient information about the two tokens—named Ducat and Locke—the company wanted to issue. Required information about American CryptoFed was also missing from the form, the SEC said in a statement Wednesday.
American CryptoFed in July became the first decentralized autonomous organization in the U.S. to be granted legal status, when it registered in Wyoming. The company runs on the EOS blockchain and says it wants to introduce a new monetary system to the U.S.
In the cryptocurrency world, a decentralized autonomous organization—or DAO—is an organization that spreads out control to token holders rather than relying on a paid hierarchy like a typical company. DAOs tend to use the Ethereum blockchain to function, though some have popped up on other smart contract-enabled networks.
In March, Wyoming passed a bill that recognizes DAOs as limited liability companies. It was the first state to do so, adding to Wyoming’s reputation as a crypto-friendly state.
Wyoming has long welcomed crypto companies to the Cowboy State. In 2019, it passed a series of crypto-friendly bills designed to attract fintech innovators. Last year, it became the first state in the U.S. to issue a crypto banking charter. And Wyoming’s junior senator, Cynthia Lummis, has frequently praised Bitcoin, too.
Though it’s the first DAO LLC in Wyoming, American CryptoFed has already run into trouble—and may not be able to issue its tokens at all.
“The SEC’s order institutes administrative proceedings to determine whether it is necessary and appropriate for the protection of investors to deny or suspend the effective date of American CryptoFed’s registration of the ‘Ducat’ and ‘Locke’ tokens,” the SEC clarified in its statement.
Kristina Littman, the SEC enforcement division’s cyber unit’s chief, added: “We allege American CryptoFed made materially misleading statements and failed to provide legally required information in its registration form.”
The Wyoming DAO law has faced some criticism. Preston Byrne, a partner at Anderson Kill Law, said the law would be used “by token hawkers to justify selling ‘shitcoins and half-baked code’.”
The American CryptoFed DAO was the first DAO LLC ever, so this is not a great start for the Wyoming law (which should be repealed).
tl;dr if it’s a DAO it shouldn’t be incorporated, its properties should be entirely emergent and it should be controlled by no-one.
— Preston Byrne (@prestonjbyrne) November 10, 2021
An administrative law judge will decide whether to deny or suspend the registration of American CryptoFed’s tokens, pending further investigation.