Faculty of law blogs / UNIVERSITY OF OXFORD

DAOs vs Nation States: A Wyoming DAO’s Experiment with the U.S. Securities and Exchange Commission


Xiaomeng Zhou
Co-organizer of American CryptoFed DAO LLC


Time to read

5 Minutes

American CryptoFed DAO LLC (CryptoFed) is the first DAO established under Wyoming DAO legislation. CryptoFed filed Form 10 and Form S-1 with the U.S. Securities and Exchange Commission (SEC) in September 2021 to register its tokens. My paper elaborates on this ground-breaking experiment with the SEC. The experiment was designed to solve a common Catch-22 dilemma which was vividly described by SEC Commissioners Hester Peirce and Mark Uyeda in their dissenting opinion, through an imaginary dialogue between the SEC and any similar firm seeking registration (Future ShapeShift or ‘FSS’):

Future ShapeShift (FSS): Hello, I would like to register as a dealer. 

SEC:  Why? 

FSS:  Because I think some of the assets that I plan to deal might be deemed at some point by the SEC to be securities. 

SEC:  Which ones? 

FSS:   I’m not sure because I can’t really understand what criteria you use to decide whether a token offering is a securities transaction and, if it is, whether the token that was the subject of the investment contract remains a security in secondary market transactions. 

SEC:  Well, if you don’t know whether you’re dealing in securities, you can’t register.  And by the way, if some of the assets you’re dealing in are not securities, you also can’t register. 

FSS:  So can you help us think through which assets are securities? 

SEC:  No.  We suggest that you read the 2017 DAO report, and it will all be clear to you.  You can also look at our enforcement actions if you want.

FSS:  I read it, and I’ve read about your enforcement actions.  I still have questions. 

SEC: Hire a lawyer. 

FSS:  I did, and the lawyer has even more questions. 

SEC: Sorry, we cannot help any more than we already have. We don’t give legal advice. 


To defuse the SEC’s tactics illustrated in the screenplay above, in both Form 10 and Form S-1, CryptoFed has clearly stated that filing registration statement does not mean CryptoFed concedes its tokens are securities. Furthermore, CryptoFed did not include the financial statements required by Form 10 and Form S-1, because a true ‘DAO itself in almost all circumstances would not be able to produce financial statements prepared in accordance with generally accepted accounting principles.

Two months after CryptoFed’s filing in September 2021, the SEC issued an order instituting administrative proceedings which stayed the process of automatic effectiveness of the Form 10 (Stay Order). Because the Exchange Act does not authorize the SEC to stay a Form 10 filing, on 15 December 2021, CryptoFed filed a Motion to Lift the Stay Order pursuant to SEC’s Rule of Practice 250 (a) codified in 17 CFR § 201.250 (a) (Rule 250 (a)) requires the SEC to ‘promptly grant or deny the motion’). On 7 June, 2023, seventeen months later, the SEC issued an order admitting, at footnote 13, that the Motion to Lift the Stay Order is still pending, and in the main text at page 3 said: ‘we are aware of only one prior instance in which the Commission instituted a Section 12(j) proceeding as to a not-yet-effective Exchange Act registration statement, but that proceeding settled shortly after the Form 10 became automatically effective...’ (emphasis supplied).

Therefore, in the SEC’s 90-year history, a stay order has never existed for any not-yet-effective Form 10 registration statement, and under no circumstances, can the SEC legally issue a stay order to prevent a Form 10 registration statement from becoming effective if a token is a security. In other words, once a stay order is issued to prevent a Form 10 registration statement from automatically becoming effective 60 days after filing, the token must be a non-security and outside the SEC’s jurisdiction. As of today, the Motion to Lift the Stay Order is still pending. The SEC’s inability to come to a decision has demonstrated that the SEC’s power and jurisdiction can be constrained, and that it is possible for a true DAO to prove through the Form 10 registration process that the DAO’s tokens are not securities.

The SEC’s indecision and nondecision not only violated Rule 250(a) requiring the SEC to ‘promptly grant or deny the motion’, but also violated the Fifth Amendment Due Process Clause of the U.S. Constitution, because the SEC created a vague situation lacking fair notice as to what CryptoFed should do to comply with the securities laws. On this point, the US Supreme Court has emphasized in F.C.C. v. Fox Television Stations, Inc 567 U.S. 239 (2012) at 2317-2318 that ‘a fundamental principle in our legal system is that laws which regulate persons or entities must give fair notice of conduct that is forbidden or required… This requirement of clarity in regulation is essential to the protections provided by the Due Process Clause of the Fifth Amendment …[, which] requires the invalidation of laws that are impermissibly vague.’ The invalidation of laws means that the securities laws do not apply to CryptoFed’s tokens due to impermissible vagueness caused by the SEC’s indecision and nondecision.

Fundamentally, the SEC’s indecision and nondecision resulted from the SEC’s litigation strategy which is to effectively stop CryptoFed’s registration statements without providing clarity as to whether the CryptoFed’s tokens are securities. Instead of conducting a Howey test which could provide the clarity, the SEC emphasized in its brief dated April 18, 2023 that ‘filing the registration statement established the Commission’s jurisdiction, even if the tokens are not securities.’ However, the SEC’s ignoring the substance of economic reality contradicts the US Supreme Court’s opinion in SEC v. Howey Co. 328 US 29.

Furthermore, because the SEC only relied on filing registration statement per se to justify its jurisdiction, the CryptoFed filed a request for withdrawal of its Form S-1’s registration statement with the sole reason that its tokens are not securities. In response, the SEC issued an order to deny the request. Consequently, pursuant to Administrative Procedure Act, 5 U.S. Code § 556 (d) which states that ‘the proponent of a rule or order has the burden of proof’, CryptoFed obtained an absolute right to request the SEC to provide a Howey test. Given the SEC’s continued refusal to provide a Howey test, CryptoFed should be able to withdraw its Form S-1 registration statement with the reason that the DAO’s tokens are not securities, pursuant to the US Supreme Court’s opinion in Jones v. SEC, 298 U.S. 1 (1936) (stating ‘the right of the registrant to withdraw his application would seem to be as absolute as the right of any person to withdraw an ungranted application...’)

The US legal system based on the doctrine of stare decisis under a constitution-based federal system, has established sufficient decentralization and autonomy within the United States. To this extent, the operation of the United States is similar to that of a DAO. The genesis block is the US Constitution to which the Constitutional Amendments and the rulings of the US Supreme Court have been added as sequential blocks in accordance with predetermined due process as a consensus mechanism for consistency. The United States’ characteristics of decentralization and autonomy enable DAOs to emerge from and coexist with the existing US laws and regulations, given that the Wyoming DAO Law allows DAOs to be established within the US legal system.  

The author’s complete article can be accessed here.


Xiaomeng Zhou is one of the organizers of American CryptoFed DAO LLC, the first DAO established under the Wyoming DAO legislation.


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