Applying the Howey Test to the DAO Tokens- On July 25, 2017, the SEC issued its Report on an investigation into an ICO and related activities by the DAO, an unincorporated entity, Slock.it UG (“Slock.it”), a German corporation, and various principals and participants. Previously in this Lawcast series I went through the parameters of the Howey Test to determine if a particular investment contract is a “security” under the federal securities laws. I also have detailed the relevant facts related to the DAO and its ICO offering. Applying the Howey Test to the DAO Tokens, the SEC notes that “money” need not include cash, but rather can be anything of value. A contribution of ETH is an investment of “money” as considered by the Howey Test. Investors in the DAO were investing in a common enterprise with the expectation of profits, including dividends and increased value. The SEC also found that the profits were to be derived from the efforts of others, including Slock.it, its founders and the DAO curators...

1. Applying the Howey Test
to the DAO Tokens
Applying the Howey Test to the DAO Tokens- On July 25, 2017, the SEC issued its
Report on an investigation into an ICO and related activities by the DAO, an
unincorporated entity, Slock.it UG (“Slock.it”), a German corporation, and various
principals and participants. Previously in this LawCast series I went through the
parameters of the Howey Test to determine if a particular investment contract is a
“security” under the federal securities laws. I also have detailed the relevant facts
related to the DAO and its ICO offering…

2. Applying the Howey Test to the DAO Tokens
• Applying the Howey Test to the DAO Tokens- On July 25, 2017, the SEC issued its
Report on an investigation into an ICO and related activities by the DAO, an
unincorporated entity, Slock.it UG (“Slock.it”), a German corporation, and various
principals and participants. Previously in this Lawcast series I went through the
parameters of the Howey Test to determine if a particular investment contract is
a “security” under the federal securities laws. I also have detailed the relevant
facts related to the DAO and its ICO offering.
• Applying the Howey Test to the DAO Tokens, the SEC notes that “money” need
not include cash, but rather can be anything of value. A contribution of ETH is an
investment of “money” as considered by the Howey Test. Investors in the DAO
were investing in a common enterprise with the expectation of profits, including
dividends and increased value. The SEC also found that the profits were to be
derived from the efforts of others, including Slock.it, its founders and the DAO
curators.

3. Applying the Howey Test to the DAO Tokens
• In its analysis of whether the DAO was a security, the SEC spent the most
discussion on the “from the efforts of others” factor. Presumably this is
because the DAO was established as an autonomous organization with
participants voting on all projects. However, the Slock.it team, through its
curators, management of the DAO website and participation in online
forums, “led investors to believe that they could be relied on to provide the
significant managerial efforts required to make the DAO a success.”
Moreover, in fact, the curators and Slock.it team did exercise significant
control over proposals and operations of the DAO and were responsible for
stopping the hacking attack and coming up with a plan to rectify the
situation.
•

4. Applying the Howey Test to the DAO Tokens
• The SEC also noted that the DAO Token holders voting rights were limited. The
DAO Token holders could only vote within the rules (code) established by the
Slock.it management team. The SEC points to case law related to multi-level
marketing schemes which were considered securities despite the labor put forth
by the investors because the promoter dictated the terms and controlled the
scheme itself. The SEC stated that “[T]he 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.” Furthermore, the SEC questioned
the level of disclosure on projects, believing that such disclosure was not “full and
fair” such as to allow an informed investment decision.

5. Applying the Howey Test to the
DAO Tokens