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D. The Legitimacy of the DAO Token Sale
Regulators look at The DAO token sale as a crowd sale. In this light, regulations governing crowdsales across jurisdictions make a fairly common distinction between reward-based vs. equity-based crowdfunding.
Reward-based crowdfunding is generally left largely unregulated. However, there is legal precedent, especially in the United States, that any campaign in which contributors receive what smells, looks and feels like a “share” will be seen as an investment and therefore subjected to the full weight of applicable securities laws. These laws typically include rules on who can and cannot be canvassed, the degree of accreditation of those who can ultimately invest, what degree of disclosure is required, who can sponsor the actual offering, etc.
Scenario 1: The DAO only funds unincorporated projects on Ethereum
A first scenario deals with The DAO's stated intent to fund unincorporated collaborative efforts on Ethereum. In this case, there appears to be no formal stake by The DAO in the projects it funds, and the main economic motive for funding projects would appear to be the delayed gratification from an expected Ether price rise as a result of more projects being built on Ethereum. Such token sale is arguably akin to a Kickstarter-type rewards-based crowdfunding campaign.
However, in our analysis, the fact there is the expectation of a monetary reward from dividends accruing to individual DTHs, and that this Ether reward - if it materialises - is ultimately convertible into fiat currency, significantly increases the risk that such token sale will be considered an equity-based crowdfunding campaign in which shares are offered to the public at large. If so, regulators will consider The DAO and future DAO token offerings an “investment” and securities regs will kick in.
Scenario 2: The DAO also funds incorporated ventures
The above analysis applies more forcefully if the DTH were to agree that The DAO’s funding should go beyond pure digital collaborative efforts and include some sort of exposure to real-world companies. In such scenario, the need for safeguards for the DTH as investors may actually make it desirable — rather than merely painful — for existing securities laws to kick in.
Such laws are also meant to mitigate the risk of litigation against The DAO. As it is doubtful that The DAO has legal personality in itself, such litigation is likely to "pierce the DAO veil" and go after the actual developers of The DAO’s smart contract who are likely to be seen as the "promoters" of the token sale. As long as the token sale was done in accordance with applicable laws, no investor should be able to turn against them and sue for damages in case the investment turned sour.
The Ethereum Foundation itself and its principals took ample precaution in this respect: the legal template for its initial coin offering, albeit expensive, significantly helped mitigate the legal risks from disgruntled token holders suing in case Ether took a nosedive.
The example of the Foundation shows that adherence to existing securities laws does not have to stand in the way of radical innovation. The DAO may have acted with more disregard for applicable laws and it may ultimately be the very authors of its smart contract who could be found in breach of securities laws if regulators were to decide to take enforcement action. This is a price no intrepid entrepreneur should have to pay.
As painful as it may seem to purists, we advocate token sales to migrate to licensed crowdfunding platforms, whereby the platform sponsor is conducting the sale under its regulatory umbrella, and even provide the DAOs with the tools to accredit investors, build the offering's book and govern itself by way of a smart-contract powered boardroom.
Such approach, whilst keeping the decentralised nature of the token sale and the funding proceeds fully intact, would provide a regulatory umbrella under which the offering can be legitimately conducted.
With this in mind, Otonomos is in the process of applying for a crowdfunding license for its London entity and is including Singapore and even the U.S. in its review of possible other jurisdictions.