While the SEC investigation and report on the DAO has made a lot of headlines, it shows the SEC’s naivete and lack of understanding regarding blockchain technology and subsequently DAOs. Below are some examples from #theDAOReport. I’m not licensed as a lawyer in US. The article expresses my personal views.
“Although The DAO has been described as a “crowdfunding contract,” The DAO would not have met the requirements of Regulation Crowdfunding, adopted under Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012 (providing an exemption from registration for certain crowdfunding), because, among other things, it was not a broker-dealer or a funding portal registered with the SEC and the Financial Industry Regulatory Authority (“FINRA”)”
Literally it was a crowdfunding contract. Just a crowdfunding contract. No Broker Dealers which are expensive intermediaries, even sometimes corrupted. Also, it took 4 years for theSEC to implement regulation crowdfunding, and eventually it proved to be a failure.
The world would have been still waiting for a global scale crowdfunding, if not for blockchain technology. Using blockchain technology allow any person in the world can easily raise capital from other persons who hold digital currencies. This mechanism allows a freer movement of capital globally and removes gatekeepers. The inclusive nature of it gives a chance for fairer distribution of wealth.
“On or about April 29, 2016, Slock.it deployed The DAO code on the Ethereum Blockchain, as a set of pre-programmed instructions.”
The community deployed the code not Slock.it. To this day people can still independently deploy it (triple check RecursiveCall).
“Slock.it also created and maintained other online forums that it used to provide information to DAO Token holders about how to vote and perform other tasks related to their investment.“
The SEC conclusion seems to be misleading again: daohub.org started by community members (Auryn Macmillan), another major site to evaluate proposals was dao.consider.it, an independent online tool. Also the slack channel for TheDAO was eventually donated to the community.
“At the time of the offering, The DAO’s protocols had already been pre-determined by Slock.it and its co-founders“
That SEC record of events does not correspond the project’s github account. There were 21 contributors, while slock.it employed only 3 people. That is a relative large amount of contributors to a new open source project.
“There were no limitations placed on the number of DAO Tokens offered for sale, the number of purchasers of DAO Tokens, or the level of sophistication of such purchasers”
The SEC really correlates sophistication with wealth, by an arbitrary label called Accreditation. The standard for accreditation is whether one has $1m USD in assets excluding his primary residence. The SEC discussed changing the discriminating limitation on investing capital once, but it turned out for the worse. Of course, as it took 4 years for Regulation Crowdfunding and 1 year and two months for the SEC to decide on theDAO legal standing, it can be years until we see any progress here.
“Curators could impose their own subjective criteria for whether the proposal should be whitelisted for a vote by DAO Token holders. (…) that (Curators) clearance process did not include any mechanism to provide DAO Token holders with sufficient information to permit them to make informed voting decisions.”
It seems theSEC didn’t understand the Curators role at all. It was just “trivial and entirely algorithmic — no judgement whatsoever is required” as co-author of Ethereum Gav Would himself have put it. They were acting as “identity oracles", and you can think of a scenario in the future that a non human version of such oracles would replace them (such as Uport or oraclize.it).
Curators were volunteers, they did it through their own free will. Any attempt to attaching attributes to Oracles will be problematic. Although larger groups of curators or independent oracle services, might have been better, theDAO Curators were still monitored very closely by a large community, and could have been fired through a proposal. It would have been extremely hard for them the act on foreign interests.
“The DAO’s investors relied on the managerial and entrepreneurial efforts of Slock.it and its co-founders, and The DAO’s Curators, to manage The DAO and put forth project proposals that could generate profits for The DAO’s investors”
The whole point of theDAO was to allow anyone to participate and suggest proposals. You didn’t have to be one of slock.it guys or a Curator to submit a proposal, on the contrary, check the community strong refusal for the slock.it security proposal.
Also “essential managerial efforts which affect the failure or success of the enterprise” might have been less relevant on the long run as the contribution of Slock.it becomes less significant. Community would govern the organization mostly through software, bringing the A back to DAO, the autonomous organization that is managed by no one and everyone.
Finally it is not clear that “managerial and entrepreneurial efforts” can easily fit open sourced development. Howey test is from 1946, long before the concept of open source software was born. Any user could contribute to theDAO code, and if slock.it disappeared theDAO would still run, thus it is harder to determine that slock.it, or anyone, were essentially the managers of this open sourced project.
“That the “projects” could encompass services and the creation of goods for use by DAO Token holders does not change the core analysis that investors purchased DAO Tokens with the expectation of earning profits from the efforts of others.”
Enter the unfulfilled vision of Universal Sharing Network. That is the essence of blockchain, it promises to scale and coordinate human activity to provide profit and utility. Public company usually distribute profit as dividend in fiat, or sometimes as dividend in kind, mostly for tax considerations. Token can represent both usage rights in a network as well as the opportunity to profit from the popularity of that network. Little do we know where this will go and we’re only starting to scratch the surface of it’s potential in the token economy.
In theDAO example holders could collectively fund Airbnb-Decentralized project and the collected fees that would be then redistributed to DAO holders either with ETH (crypto currency or a usage rights of Ethereum blockchain) or with the Decentralized Airbnb Tokens themselves, granting direct access to bed and breakfasts all over the the Decentralized Airbnb’s listings. Accordingly, participators of theDAO could also have expected goods in return.
“The voting rights afforded DAO Token holders did not provide them with meaningful control over the enterprise, because (1) DAO Token holders’ ability to vote for contracts was a largely perfunctory one; and (2) DAO Token holders were widely dispersed and limited in their ability to communicate with one another”
The opposite, theDAO was a self-executing program! Although perfunctory is a nice word I had to google translate, the voting right granted could not been anymore efficient: the user held it’s own voting rights and interacted directly with the software, not an intermediary that collects fees using proxy schemes.
As for the ability to communicate, well it’s the internet era. People and companies now days are using slack, forums and instant messaging apps. The whole point of the internet is to allow people to share information and collaborate on it (anyone remember the Arab Spring?). Wall St. still use snail mail and fax, while online communities and team members can give 24/7 online support. It’s an online companionship, or a partnership. And this phrase is actually crucial.
Courts found that general partnership is not a security because partners have significant control over the enterprise. But according to the SEC, theDAO holders had limited control, and their voting rights resembled more those of a corporate shareholder.
In Williamson Case it was found, that a general partnership or joint venture can be a security if: (1) there is little power in the hands of the partner or venture;(2) or the partner is so inexperienced that he is incapable of intelligently exercising his partnership powers;(3) or the partner is dependent on unique entrepreneurial ability of the manager that he cannot replace him.
This is not the case with blockchains. Satoshi proved us otherwise.
Williamson case is from May 21st 1981, long before the internet, even longer before bitcoin. Satoshi left bitcoin and yet it still goes on. Power is inherently decentralized on the blockchain, it’s an open source software that everyone can access the code, and benefit from it even if they are not knowledgeable about SHA256. Partnerships can and should occur online with large amount of people, it’s the only path forward to human coordination. When bitcoin appeared out of nowhere, the internet won a new unit of account and a store of value, it’s own currency.
The SEC’s current regulation doesn’t allow for the public at large to form an organization together. The SEC is actually saying that online networks are incapable to collaborate and make decisions on their own budget. Unless of course they go through the SEC non practical registration process. The SEC findings endanger the future of crypto currency based social networks.
Unfortunately the SEC didn’t really bother to deep dive into the meanings of forks and theDAO’s split function. These are innovative online mechanisms which allow groups to maintain independence from larger groups, and effectively have their own course of action in cases of disagreements.
Now Andreas Antonopoulos is publicly saying that not every security should be registered with the SEC. Bity furthermore argued that theDAO creation was similar to a creation event of a big organization, and that doesn’t necessarily needs an approval. Bitcoin was created, without a permission, and is currently integrated to our legal system.
It’s also important to emphasis that most ICO’s are distributing consumable token to the users, and not a partnership units. This could be another discussion, but in short consumable tokens are spendable on a certain platform to access it. These are different than securities, where one holds them and solely expects a dividend or some kind of return on investment.
Enforcement gets harder in the new world we are building, and lawmakers are still scratching their heads. But innovation will not stand still. It used to be a world with no shareholders. Monarchs used to have all the rights. Then limited liability companies appeared with restrictions on registration (and securities regulations after the great depression), but now a virtual organizations world is forming. It will be different than anything we’ve ever know. As we’re moving forward to more automatic, information based approaches to finance, it only make sense to create such environment more decentralized and open sourced.
Just like theDAO.
As the wolf said, ask for forgiveness not for permission...
Thanks to @drewhink @DinoMiha and @udiwertheimer for their comments!
And one more thing...
“During the period from May 28, 2016 through September 6, 2016, one such Platform executed more than 557,378 buy and sell transactions in DAO Tokens by more than 15,000 of its U.S. and foreign customers. During the period from May 28, 2016 through August 1, 2016, another such Platform executed more than 22,207 buy and sell transactions in DAO Tokens by more than 700 of its U.S. customers.” —Where is the source? #ELI5SEC