Ethereum and the SEC: Why Most Distributed Autonomous Organizations are Subject to the Registration Requirements of the Securities Act of 1933 and a Proposal for New Regulation

Abstract

In a world full of new technology, the risk of fraud is constantly increasing. In the securities industry, this risk existed long before the use of technology. Congress enacted the Securities Act of 1933 to combat the risk of fraud and misrepresentation in the sale of securities. By requiring full disclosure, investors have the opportunity to make informed decisions prior to investing. However, Distributed Autonomous Organizations (“DAOs”), through the use of blockchains and smart-contracts, engage in the sale of securities without fully disclosing the risks or complying with the registration requirements of the Securities Act of 1933. Compliance with the burdensome requirements of registration, however, would destroy this new technology and method of conducting business. To avoid this set-back, Congress must amend the registration requirements to provide an exemption for DAOs. This exemption, although reducing current registration burdens, must still require DAOs to disclose certain information, thereby ensuring investors are informed prior to investing. Furthermore, due to the unique nature of the blockchain, smart-contract, and DAOs, Congress must impose a fiduciary duty on the creators of DAOs to ensure compliance with the disclosure requirements. Further, Congress should consider the allowance of burden-shifting following the initial crowdsale.