In The Matter Of The Dao Exchange Act Release No.

Facts

From April 30, 2016, through May 28, 2016, The DAO (D) offered and sold approximately 1.15 billion D Tokens in exchange for a total of approximately 12 million Ether (ETH), a virtual currency used on the Ethereum Blockchain. This offering was valued at $150 million. “D is supposed to be an effort to create a “crowdfunding contract” to raise “funds to grow a company in the crypto space.” D is a “for-profit entity,” where participants would send ETH (a virtual currency) to D to purchase D Tokens, which would permit the participant to vote and entitle the participant to “rewards.” All funds raised were to be held at an Ethereum Blockchain “address” associated with D and D Token holders were to vote on contract proposals, including proposals to D to fund projects and distribute D’s anticipated earnings from the projects it funded. D was intended to be “autonomous” in that project proposals were in the form of smart contracts that exist on the Ethereum Blockchain and the votes were administered by the code of D. On or about April 29, 2016, Slock.it deployed D code on the Ethereum Blockchain, as a set of pre-programmed instructions. This code was to govern how D was to operate. Slock.it’s co-founders launched a website that described how D operated and included a link through which D Tokens could be purchased. Slock.it represented that The DAO’s source code had been reviewed by “one of the world’s leading security audit companies” and “no stone was left unturned during those five whole days of security analysis.” (Commentary: When we read this B.S. we had trouble completing the brief as we could not stop laughing and spent 4 hours thinking up ways to scam people out of money. Why? This software was not complex but unless and until it was debugged the no stone unturned is total scam language.) Slock.it promoted the website online. It even created an online forum. Ownership of a D Token granted the holder certain voting and ownership rights. Ownership of a D Token granted the holder certain voting and ownership rights. D would earn profits by funding projects that would provide D Token holders a return on investment. They would receive “rewards.” D Token holders would then vote to either use the rewards to fund new projects or to distribute the ETH to D Token holders. (The suckers could not resist.) Token holders were not restricted from re-selling D Tokens. Secondary market Platforms were available and Tokens were to be freely transferable on the Ethereum Blockchain. As for funding projects, a “Contractor” submits a proposal to D. Token holders were to cast votes, which would be weighted by the number of tokens they controlled, for or against the funding of a specific proposal. Before any proposal was put to a vote it was required to be reviewed by one or more of D’s “Curators.” The Curators were a group of individuals chosen by Slock.it. The Curators performed crucial security functions and maintained ultimate control over which proposals could be submitted to, voted on, and funded by D. The Curators were “failsafe protection” and for protecting D from “malicious actors.” Curators controlled the contracts and the frequency on which they were presented and voted. In late May 2016, just prior to the expiration of the Offering Period, concerns about the safety and security of D’s funds began to surface due to vulnerabilities in D’s code. (gee who would have thought). On June 17, 2016, an unknown individual or group (Attacker) began rapidly diverting ETH from D, causing approximately 3.6 million ETH-1/3 of the total ETH raised-to move from D’s Ethereum Blockchain address to an Ethereum Blockchain address controlled by the Attacker. Apparently what we call the Clown Show at the SEC began to investigate D. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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