SEC Slams 'Decentralized' DAOs: A $1.7M Settle-up with BarnBridge

• BarnBridge DAO Settles SEC Allegations with $1.7 Million Payment
• Unregistered Investments Draw SEC Attention
• DAOs and Their Regulatory Challenges
• Settlement Details and Implications
• SEC's Stance on Crypto Firms and DAO Structures
• Continued Governance by BarnBridge DAO's Founders

BarnBridge DAO Settles SEC Allegations with $1.7 Million Payment

The Ethereum$2,315 -2.42% based cryptocurrency project, BarnBridge DAO, and its founders have consented to pay $1.7 million to resolve allegations from the Securities and Exchange Commission (SEC) of offering illegal cryptocurrency securities to U.S. investors. As a result of this agreement, the project will cease its structured crypto investment product dubbed SMART Yield, which has been likened to highly rated debt instruments by BarnBridge.

Unregistered Investments Draw SEC Attention

Financial authorities stated that the SMART Yield failed to register as an investment company, despite accruing $509 million from crypto investors, some of which were from the U.S. It is not uncommon for the SEC to investigate cryptocurrency companies for alleged securities violations. However, the case of BarnBridge DAO is significant as it might be the first to target a crypto startup structured as a decentralized autonomous organization, or DAO.

DAOs and Their Regulatory Challenges

A DAO is a business theoretically accountable to its token holders. In the context of BarnBridge, any holder of its BOND token could participate in its operations. Financial startups identifying as DAOs do not always register as companies, and it is even more uncommon for such entities to view their products as securities that need SEC registration. This can lead to complications if their offerings are accessible to U.S. investors, such as with BarnBridge, which, according to the SEC, did not take preventive measures to stop U.S. investors from buying into its SMART Yield product.

Settlement Details and Implications

The SEC accused BarnBridge's founders of violating registration requirements and other regulations. Both founders agreed to pay individual civil penalties of $125,000, while BarnBridge DAO accepted to disgorge $1,457,000 to the SEC. In both instances, the parties neither admitted nor denied the allegations.

The specific allegations against SMART Yield by the SEC raise broader questions about its stance on DeFi structures such as pools, lending, staking, and stablecoin returns. However, as securities lawyer Drew Hinkes noted, the settlement offers no general answers due to its non-precedential nature.

SEC's Stance on Crypto Firms and DAO Structures

While the SEC has been stringent with alleged infractions of U.S. securities law by crypto firms, some commission members, notably Hester Pierce, have criticized SEC orders perceived as overly restrictive for an evolving financial innovation area. Interestingly, Pierce did not dissent on this particular case.

The SEC, which referred to BarnBridge DAO as a purportedly decentralized autonomous organization, did not approve of its DAO structure. According to them, the founders played a significant role in the daily operations and unique crypto governance features of the business. They held substantial amounts of BarnBridge's BOND. In essence, every proposal approved by the DAO required, and received, the founders' votes to reach a quorum.

Gurbir S. Grewal, Director of the SEC's Division of Enforcement, highlighted this case as a crucial reminder that all entities seeking access to U.S. capital markets, whether incorporated, decentralized, or autonomous, must comply with the laws.

Continued Governance by BarnBridge DAO's Founders

Despite the SEC's views, BarnBridge DAO's founders continued their governance role until the end. In October, they organized a vote to seek approval for a settlement with the SEC, and they passed it using their tokens.

Edited by Jonathan Stoker