US SEC Starts Administrative Proceedings against American CryptoFed

The United States Securities and Exchange Commission (SEC) kicked off administrative proceedings on Friday against American CryptoFed, a Wyoming-based decentralized autonomous organization (DAO).

The regulator wants “to determine whether a stop order should be issued to suspend the registration of the offer and sale of two crypto assets, the Ducat token and the Locke token,” the SEC announced in a statement issued on Friday.

Ducat token is an algorithmic stablecoin while Locke is a government token created by American CryptoFed.

The US securities regulator’s action comes over one year after American CryptoFed filed a Form S-1 registration before the Commission. Form S-1 is an initial registration required of companies that want to offer new securities to the public. American CryptoFed also filed a Form 10 registration that sought to register the tokens as equity securities. However, the SEC rejected the registrations.

In November last year, the regulator halted the registration of the two tokens, alleging that the DAO failed to provide information on its “business, management and financial conditions.” This included audited financial statements.

The firm’s filing also “contained materially misleading statements and omissions, including inconsistent statements about whether the tokens are securities,” the regulator said. In the same month, the regulator issued an order examination to determine whether a stop order should be issued against the DAO’s registration.

However, in the Friday statement, the SEC alleged that American CryptoFed failed to cooperate with its examination of its registration statement. Regardless, Marian Orr, the firm’s CEO, told CoinDesk last year that it refuted “point by point” the criticisms raised by the regulator.

Recent Developments

According to a recent SEC filing, in May 2022, American CryptoFed wrote to the Commission stating that it would proceed with issuing the tokens in July 2022. But, in June, the firm instead filed an application to withdraw its registration from the Commission. The SEC said it rejected the application on the ground that “granting of the withdrawal request is not consistent with the public interest and the protection of investors.”

In the new SEC statement, David Hirsch, the Chief of the Enforcement Division’s Crypto Assets and Cyber Unit, noted that an issuer that wants to offer crypto assets as securities transactions “must furnish the required disclosure information to the SEC.”

“American CryptoFed not only failed to comply with the disclosure requirements of the federal securities laws, but it also claimed that the securities transactions they seek to register are not in fact securities transactions at all,” Hirsch said.

Are Cryptocurrencies Securities?

In 2018, Jay Clayton, the former SEC Chair, noted that most cryptocurrency products qualify as securities and should be registered with the Commission as such. In August last year, Gary Gensler, the current SEC Chair, echoed the same thought, noting that the securities regulator counts many cryptocurrency coins and tokens as securities.

As a result of this disposition towards digital assets, the SEC has been waging war against crypto startups flying crypto offerings without registering them as securities.

These battles include those the regulator has fought or is fighting against creators such as Kik Interactive which raised almost $100 million from the sales of its 'Kin' digital tokens, digital asset lender BlockFi Lending, which offers interest-bearing accounts, and Ripple Labs which raised over $1 billion dollars from sales of its XRP token, all without being registered as securities.

With US President Joe Biden's recent executive order calling for a harmonious regulation of the emerging cryptocurrency industry, it remains to be seen what final direction the world's largest economy will take with regard to cryptocurrency regulation.