Disclaimer: The article has been updated based on an official response from the US CryptoFed DAO. COO Xiaomeng Zhou explained why the SEC is not legally allowed to issue a stop order.
American CryptoFed DAO, the first decentralized autonomous organization (DAO) to gain legal recognition in the United States, is in danger of losing its registration after the United States Securities and Exchange Commission (SEC) unearthed irregularities in its Form S-1 registration statement dated 17 September 2021.
The Wyoming Secretary of State’s office recognized American CryptoFed as a legal entity in July 2021[ads1], at a time when the organization’s executive director, Marian Orr, opined that “Wyoming is arguably the top blockchain jurisdiction in the world.”
However, on November 18, 2022, the SEC initiated administrative proceedings against the DAO to determine the issuance of a stop order. A stay order from the SEC would revoke American CryptoFed’s registration and bar sale of internal tokens, Ducat and Locke.
According to the SEC’s Division Of Enforcement, American CryptoFed’s Form S-1 registration statement is missing important information such as audited financial statements and details about its business and management. The SEC further opined that the US CryptoFed filing contains “misleading statements and omissions”, while also being inconsistent in describing tokens as securities.
In this regard, David Hirsch, head of the Enforcement Division’s Crypto Assets and Cyber Unit, stated 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 it seeks to record are not actually securities transactions at all.”
Hirsch clarified that issuers must provide the necessary information to the SEC. However, the SEC alleged non-cooperation from US CryptoFed during its investigation of the registration statement.
Based on the information made publicly available, Hirsch shared SEC intent regarding the DAO:
“Enforcement Division Seeks to Stop American CryptoFed’s Registration to Protect Investors from Misleading Information.”
Speaking to Cointelegraph, US CryptoFed chief operating officer and organizer Xiaomeng Zhou argued against the SEC’s claims, stating that the Section 8(d) order can only apply to effective registration statements. To the extent that the section 8(d) order is applied to the registration statement, which is “pending and not yet effective,” it is applied to the wrong subject and is illegal because the “effectiveness of the registration statement” has not yet existed, and section 8(d) The order cannot stop the subject that does not exist, Zhou explained.
For American CryptoFed DAO’s Form S-1 Registration Statement which “is pending and not yet effective”, it is subject to the rejection order of Section 8(b) of the Securities Act of 1933 which clearly states “the Commission may, […] issue an order prior to the effective date of registration refusing to permit such declaration to take effect until amended in accordance with such order.
As a result, the US CryptoFed DAO’s Form S-1 is a subject of Section (a) and Section 8(b) of the Securities Act of 1933, according to Zhou. He added:
“Section 8(b) of the Securities Act of 1933 only allows the SEC to issue a refusal order to provide additional clear guidance for the American CryptoFed DAO to complete the Form S-1 registration (not a stop order).”
Zhou reiterated that Section 8(b) of the Securities Act of 1933 allows the SEC to issue a denial order and provide clear guidance for completing the Form S-1 registration. However, it does not allow the federal agency to issue a stop order:
“As a result, the SEC misused the Securities Act of 1933 to unlawfully delay, stop, and obstruct American CryptoFed DAO’s legitimate disclosure through the Form S-1 Registration Statement.”
Cointelegraph found that the official Telegram channel for The DAO has been disabled.
However, the deletion of the Telegram account was not yet linked to the SEC’s investigation at the time of writing.
Related: US national crypto laws should look like New York’s, state regulator says
The Securities Commission of the Bahamas (SCB) recently ordered the transfer of all digital assets of FTX Digital Markets (FDM) to a digital wallet owned by the commission.
The Securities Commission of the Bahamas takes over control of the assets of FTX Digital Markets Ltd. pic.twitter.com/IzW4PGZSJm
— Securities Commission of the Bahamas (@SCBgov_bs) 18 November 2022
The assets were seized “for safekeeping,” according to an official statement shared by SCB.