Unmapped Territory: SEC Commissioners Peirce and Uyeda Dissent on Commission’s Decision to Refuse CryptoFed DAO’s Request to Withdraw a Not Yet Effective Registration Statement

 

SEC Commissioners Hester Peirce and Mark Uyeda have issued a public dissent of the Commission’s decision to deny CryptoFed DAO’s request to withdraw its registration statement and the motion to dismiss the case by the Division of Enforcement.

In brief, in November 2021, the SEC sought to block CryptoFed DAO’s attempt to pursue two token offerings. The Wyoming-based entity sought to issue two digital assets – Ducat and Locke.

In a public release at the time of the filing, CryptoFed explained:

“CryptoFed has innovated two native tokens, Locke and Ducat, ‘to jumpstart a network and to motivate a network overtime’.  We explain in our Form 10 filing, Item 1 Business, Section 2.9 Locke and Ducat as Utility Tokens, why Locke and Ducat are utility tokens, not securities. However, if SEC classifies Locke and Ducat tokens as securities, our intent is to file Form S-8 after our Form 10 filing takes effect, but before SEC declares our Form S-1 filing effective.  Then we will be able to continue granting restricted and untradeable Locke tokens, free of charge, to contributors according to the CryptoFed Equity Incentive Plan as defined by the CryptoFed Constitution.”

At that time, the SEC claimed the filing was “materially deficient and misleading.

While convoluted at best, CryptoFed wanted to become the first legally recognized DAO [decentralized autonomous organization] in the USA as well as the first public DAO. The company was unable to accomplish this goal. An administrative hearing regarding the issue was scheduled by the Commission to resolve the matter.

On July 6, 2022, CryptoFed submitted a “Request for Withdrawal of Registration Statement,” which was never effective. The SEC Division of Enforcement apparently did not object to the request, and per prior treatment of similar situations, the Division issued a motion to dismiss. This is now being denied.

It appears that the SEC is now the Hotel California of securities law, as the Commission must now approve a request to withdraw a registration statement, contravening established staff guidance.

The two Commissioners state in their dissent:

“Today’s Order announces for the first time that, contrary to prior Division of Corporation Finance staff guidance, a company must have the Commission’s approval to withdraw a filed, but not yet effective registration statement if there is a related Section 12(j) proceeding pending.

If the Commission wants to change its staff’s longstanding guidance, it should consider fully the implications of what it is doing and explain why the change is needed. A procedural order resolving a motion in an adjudication proceeding is poor means to that end and is an example of the Commission regulating companies through the enforcement process.”

The dissenting Commissioners believe that the request to withdraw was effective when filed per past precedent. Otherwise, the denial places the Commission in “unmapped territory,” where you can check out of a registration statement but never leave the Commission’s enforcement scrutiny.

The full dissent (and better explanation) by Commissioners Peirce and Uyeda is available here.


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