13 BLOCKCHAIN, TOKEN SALES, AND SEC GUIDANCE Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, Exchange Act Release No. 81207 (July 25, 2017) The DAO, one example of a Decentralized Autonomous Organization, was a virtual organization embodied in computer code and executed on a distributed ledger, or blockchain, across computers worldwide. The DAO was an entity created to operate for profit by receiving and holding assets through the sale of DAO tokens to investors, and to use those assets to fund projects. Between April and May 2016, The DAO sold approx- imately 1.15 billion tokens, raising the equivalent of approximately $150 million. DAO token holders stood to share in the anticipated earnings from projects that The DAO funded as a return on their investment. DAO token holders could monetize their investments by re-selling those tokens on a number of exchanges. After DAO tokens were sold, but before The DAO began funding projects, an attacker used a flaw in The DAO’s code to steal approximately one-third of The DAO’s assets. The DAO’s creators and others responded by developing a work-around whereby DAO token holders could opt to have their investment returned to them. The SEC issued a Report of Investigation concerning The DAO (“The DAO Report”) to advise those who would use tokens to raise capital to take appropriate steps to ensure compliance with the federal securities laws. In The DAO Report, the SEC explained that the DAO tokens were securities under the federal securities laws because they satisfied all of the elements of the test articulated by the U.S. Supreme Court in SEC v. W.J. Howey Co., 328 U.S. 293 (1946). The so-called “Howey test” includes four elements: (1) investment of money (the investor must provide assets); (2) common enter- prise (the investor’s fortunes must be interwoven with those of other investors (i.e., “horizontal commonality”) and/or the efforts of the promoter of the investment (i.e., “vertical commonality”)); (3) reasonable expectation of profits (the investor must make the investment with the reasonable expectation that the value of the investment will increase or that the investor will otherwise earn profits from the investment (e.g., dividends or other periodic payments)); and (4) the profits are to be de- rived from the entrepreneurial and/or managerial efforts of others (the investor’s profits must be derived from the significant entrepreneurial and/or managerial efforts of the promoter of the investment or other third parties). The SEC concluded that DAO tokens satisfied all four elements of the Howey test and, therefore, were securi- ties under the federal securities laws. In so concluding, the SEC “reiterate[d] these fundamental principles of the U.S. federal securities laws and describe[d] their Over the past two years, there has been a significant amount of activity in the blockchain and digital currency space, with technology companies conducting approximately 1500 token sales (commonly referred to as “initial coin offerings” or “ICOs”), raising more than an estimated $26 billion in total. Building off of guidance published in 2017, the federal government has remained active in monitoring token sales to determine whether they involve potential violations of the federal securities laws, and civil plaintiffs also have alleged such violations. A brief overview of significant developments in this space follows.