Such offers and sales, which use distributed ledger or blockchain technology, are known as ‘initial coin offerings’ or ‘token sales’.

Whether a particular investment transaction involves the offer or sale of a security – regardless of the terminology or technology used – will depend on the facts and circumstances, including the economic realities of the transaction.

The SEC’s Report of Investigation found that tokens offered and sold by a virtual organisation, known as a Decentralized Autonomous Organization (DAO), were securities and are therefore subject to federal securities laws.

This report focuses on a DAO created by Slock.it and Slock.it’s co-founders, ‘with the objective of operating as a for-profit entity that would create and hold a corpus of assets through the sale of DAO tokens to investors, which assets would then be used to fund “projects”. The holders of DAO tokens stood to share in the anticipated earnings from these projects as a return on their investment in DAO Tokens,’ the SEC report states.

Issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies. Those participating in unregistered offerings also may be liable for violations of the securities laws.

Additionally, securities exchanges providing for trading in these securities must register unless they are exempt. The purpose of the registration provisions of the federal securities laws is to ensure that investors are sold investments that include all the proper disclosures and are subject to regulatory scrutiny for investors' protection.

Dean Eigenmann, CEO of blockchain start-up Harbour DAO, said: ‘The Harbour team sees this as a very positive development. The SEC states a desire to support innovative funding mechanisms, urges caution and declined to press any charges.

‘This is a big win for crypto, and Ethereum in particular, as it represents a tacit - yet official - endorsement of the space [Initial Coin Offerings]. Anything that can be done to bring this into the mainstream should be welcomed.’

The SEC report stems from an inquiry that the agency’s enforcement division launched into whether the DAO and associated entities and individuals violated federal securities laws with unregistered offers and sales of DAO tokens in exchange for ‘Ether’, a virtual currency. The DAO has been described as a ‘crowdfunding contract’ but it would not have met the requirements of the Regulation Crowdfunding exemption because, among other things, it was not a broker-dealer or a funding portal registered with the SEC and the US Financial Industry Regulatory Authority.

The SEC Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO Report is available here.

This article first appeared in CCH Financial Reporting Brief provided by Accounting Research Manager, Wolters Kluwer US.

Additional reporting by Sara White