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Crypto Law/Level III · Tokens and securities law/3.1 The Howey test/Lesson 5

The DAO Report (2017)

How the SEC first applied Howey to a token, why token-holder voting did not defeat the ‘efforts of others’ element, and what the report said about trading platforms.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Lowest-exposure DAO design: give token holders real control, with no curator or multisig able to filter, order or veto proposals; the DAO Report (Release 34-81207, 2017) found perfunctory voting left buyers relying on others. Promises of profit still count against the project.
  2. For personal liability, a low-cost wrapper such as a Wyoming DAO LLC under the Decentralized Autonomous Organization Supplement (Wyo. Stat. 17-31) can give members limited liability; the catch is annual state filings and that federal securities law applies regardless of the wrapper.
  3. Platforms listing tokens that are securities must register as an exchange or use an exemption such as an alternative trading system under Rule 3b-16; listing only non-security tokens (digital commodities or collectibles under the 2026 SEC interpretation) avoids that cost, subject to state money-transmission rules.
  4. Document who holds admin and multisig keys, what holders can vote on and how they could coordinate; this free record answers the DAO Report’s control questions. Pseudonymous governance does not remove tax reporting for distributions or rewards.

MaterialsSEC Report of Investigation: The DAO, Release No. 34-81207 (July 25, 2017), on sec.govSection 21(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78u(a)), the power under which the report was issuedThe governance documents of any DAO you know: who holds admin keys or multisig control, and what token holders can actually vote on

Wonder

  1. What was The DAO, and why did the SEC write a report instead of suing?
  2. If token holders could vote, how were they relying on the efforts of others?
  3. Why did a report about one token talk about trading platforms?

Explore

  1. On July 25, 2017 the SEC published Release No. 34-81207, a ‘report of investigation’ under Section 21(a) of the Securities Exchange Act of 1934. Such a report sets out the Commission’s view of the law without charging anyone. The SEC said Slock.it UG, a German company, its co-founders and intermediaries may have violated the securities laws, but it decided not to bring an enforcement action. Instead it used the facts to warn those using a ‘decentralized autonomous organization’ (DAO), meaning an organisation run through smart-contract code on a blockchain, that the securities laws can apply to them.
  2. The DAO was created by Slock.it and its co-founders as a for-profit entity that would fund projects and share returns with token holders. Slock.it’s chief technology officer, Christoph Jentzsch, wrote the white paper and likened the arrangement to ‘buying shares in a company and getting … dividends’. The code was deployed on the Ethereum blockchain on or about April 29, 2016. From April 30 to May 28, 2016, The DAO sold about 1.15 billion DAO Tokens for about 12 million ether (ETH), worth roughly $150 million at the time. Holders could vote on proposals and transfer tokens on web-based platforms.
  3. On June 17, 2016 an attacker used a flaw in The DAO’s code to divert about 3.6 million ETH, one third of the ETH raised. The code stopped the attacker from moving it for 27 days. Slock.it’s co-founders and others backed a ‘hard fork’, a change to the Ethereum protocol adopted by most of the network, which took effect on July 20, 2016. The fork moved all funds from The DAO, including those held by the attacker, to a recovery address where DAO Token holders could exchange their tokens for ETH. The hack shaped the story; the legal analysis concerned the original sale.
  4. Applying Howey (lesson 3.1.1), the SEC found an investment of money because ETH counts as value (lesson 3.1.2), and a reasonable expectation of profit because the promotion described a for-profit fund. The key question was effort. Proposals could reach a vote only after review by ‘Curators’, a group of eleven individuals chosen by Slock.it who held the Curator multisig key and controlled the whitelist of addresses that could receive funds. Curators set the order and frequency of proposals, and a Curator could halve the voting quorum every other week. Slock.it’s co-founders also actively promoted The DAO and its governance.
  5. Voting did not change the result. The report found holders’ voting rights gave them no meaningful control because voting was ‘largely perfunctory’, limited to proposals the Curators had cleared and often with little information, and because holders were pseudonymous and widely dispersed, making it hard to act together. The report also found that the platforms trading DAO Tokens appeared to meet the definition of an ‘exchange’ in Rule 3b-16(a), so they had to register as a national securities exchange or use an exemption, such as operating as an alternative trading system. This applies regardless of whether the issuer is a company or a DAO.
  6. The DAO Report opened the period of token enforcement that followed (lessons 3.1.6 and 3.2.1). The SEC’s March 2026 interpretation cites it as the Commission’s first application of Howey to crypto and records criticism of the enforcement-led approach that came after. It also changes the frame by classifying many crypto assets as non-securities that can still be sold subject to investment contracts (lesson 3.2.2). A practical check, drawn from the report: for any DAO, identify who can filter, order or veto proposals, who holds admin or multisig keys, and whether token holders could realistically coordinate. Personal liability in DAOs is covered in lesson 5.3.4.

Key facts

  • The DAO Report is SEC Release No. 34-81207, dated July 25, 2017, issued under Section 21(a) of the Securities Exchange Act of 1934.
  • The SEC decided not to pursue an enforcement action against Slock.it UG, its co-founders or intermediaries over The DAO.
  • From April 30 to May 28, 2016, The DAO sold about 1.15 billion DAO Tokens for about 12 million ETH, valued at about $150 million.
  • On June 17, 2016 an attacker diverted about 3.6 million ETH, one third of the ETH raised, and a hard fork took effect on July 20, 2016.
  • The report found DAO Token holders’ voting rights gave them no meaningful control, so they relied on the efforts of Slock.it and the Curators.
  • The report stated that platforms trading DAO Tokens appeared to meet the Rule 3b-16(a) criteria for an exchange.

Exercise nine, six, three, one

9CollectList up to 9 powers in a DAO you know: who can propose, filter, order, veto, execute, upgrade code, hold multisig keys or move treasury funds.
6ClusterSort them into 6 groups: powers held by a founding team, by a small appointed group, by token holders, by code with no human control, by outside service providers, and unclear.
3DistillReduce the 6 groups to 3: powers that look like essential managerial efforts by others, powers token holders genuinely exercise, and powers you would need to investigate.
1CrystallizeWrite 1 sentence explaining why the SEC said DAO Token holders’ votes did not give them meaningful control.

Fact check

Dates, figures and claims checked against the published sources listed below.

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