Crypto investment issuer BarnBridge DAO and its founders settle charges from the U.S. Securities and Exchange Commission (SEC) that they offered illegal crypto securities to American investors The company agreed to pay a total of $1.7 million (approximately 238 million yen, converted at 140 yen to the dollar). The SEC announced this on the 22nd.

Possibility of targeting DAO for the first time

Burnbridge, an Ethereum-based crypto project, plans to discontinue its structured crypto investment product called SMART Yield. Burnbridge compared this to a “highly rated debt instrument”. The SEC explained that Smart Yield was unable to register as an investment company even though it had raised $509 million from crypto investors, including investors in the United States.

The SEC often pursues crypto companies for securities violations, but Tuesday’s action was noteworthy. That’s because it may be the first time it has targeted a crypto startup organized as a decentralized autonomous organization (DAO). The DAO held a public vote on how to respond.

A DAO is, in theory, a business that has obligations to its token holders. In the case of Burnbridge, anyone who owned BOND tokens had a say in its operations. Financial startups that take the form of a DAO do not necessarily register as legal entities. It is even more rare for these entities to consider their products to be securities that must be registered with the SEC.

This can be an issue if your company’s products are available for purchase by American investors, as was the case with Burnbridge. The SEC said Barnbridge took no action to prevent U.S. investors from purchasing its Smart Yield products.

The SEC sued Ward and Murray for violations of registration requirements and other violations. Both men have individually agreed to pay $125,000 in civil fines. Barnbridge itself agreed to pay the SEC $1.457 million in restitution for ill-gotten gains. In neither case did the parties admit or deny the charges.

Questions about the SEC’s stance on DeFi structures

A look at the details of the SEC’s complaint against Smart Yield shows that the SEC’s allegations against DeFi structures, such as pools, lending, staking, and stablecoin returns, are based on a tweet from securities attorney Drew Hinkes. It raises questions about the SEC’s broader stance. However, this result does not provide a fundamental answer. Hincks pointed out that because it was a settlement, it had “no precedential value.”

so…questions abound here. AFAIK Barnbridge bondholder yields appear to have been derived from stablecoin staking/lending. Does this suggest that the SEC is now asserting that stablecoins are investment securities, or maybe only when staked/lent? This would be…new. /2

— Drew Hinkes (@propelforward) December 22, 2023

The SEC has harshly criticized alleged violations of securities laws by crypto asset companies, but it is by no means monolithic. Some members of the committee, led by Hester Pierce, have previously written dissenting opinions criticizing the SEC’s order, which they believe is unduly burdensome in the rapidly growing field of financial innovation.

Mr. Pearce did not file any such objections on Wednesday.

SEC points out that it is a “false autonomous decentralized organization”

Barnbridge’s structure as a DAO was not liked by the SEC, which called it a “false autonomous decentralized organization.”

In fact, according to the SEC, Murray and Ward contributed not only to the day-to-day operations of the business, but also to the erratic nature of crypto asset governance. The percentage of Burnbridge’s BOND held by both of them was extremely high.

The SEC’s order notes that “all proposals approved by the DAO required and were voted on by Mr. Ward and Mr. Murray to reach a quorum.”

Gurbir S. Grewal, director of the SEC’s Division of Enforcement, said in a press release: It serves as an important reminder that such laws apply to everyone who wishes to access the country’s capital markets.”

Regardless of the SEC’s opinion, the founders of Burnbridge DAO played the governance game to the end. In October, the company voted to approve the settlement with the SEC, which it passed.

｜Translation and editing: Rinan Hayashi
｜Image: Shutterstock
｜Original text: SEC Blasts ‘Purportedly Decentralized’ DAOs in $1.7M Settlement with BarnBridge