23-12-2023 (NEW YORK) BarnBridge DAO and its founders have agreed to a $1.7 million settlement with the Securities and Exchange Commission (SEC) following allegations of offering illegal crypto securities to U.S. investors. The Ethereum-based crypto project will cease its structured crypto investment product, SMART Yield, as part of the settlement.
SMART Yield, previously likened to “highly rated debt instruments” by BarnBridge, failed to register as an investment company despite accumulating $509 million from crypto investors, including those in the U.S. The SEC’s move stands out as it marks one of the first instances of the SEC targeting a crypto startup operating as a “decentralized autonomous organization” (DAO).
In the case of DAOs, businesses are theoretically accountable to their tokenholders, with BOND token holders having a say in BarnBridge’s operations. However, such entities often bypass company registration, and viewing their products as securities requiring SEC registration is even rarer.
The SEC accused BarnBridge of neglecting to prevent U.S. investors from participating in the SMART Yield product. Co-founders Troy Murray and David Ward were accused of violating registration requirements and other violations. Both have agreed to pay individual civil penalties of $125,000, while BarnBridge DAO will disgorge $1,457,000 to the SEC. The settlements do not involve admissions or denials of the allegations.
The SEC’s specific allegations against SMART Yield have raised broader questions about the regulatory stance on decentralized finance (DeFi) structures, including pools, lending, staking, and stablecoin returns. Securities lawyer Drew Hinkes, in a series of tweets, highlighted the intricacies of the SEC’s position, emphasizing that the settlement lacks precedential value.
While the SEC has consistently addressed alleged violations of U.S. securities law in the crypto space, it is not a unanimous body. Commissioner Hester Pierce, known for dissenting against what she perceives as overly burdensome SEC orders in the innovative financial sector, did not file a dissent in this case.
The SEC dismissed BarnBridge’s claim to be a “decentralized autonomous organization,” asserting that Murray and Ward played pivotal roles in the day-to-day operations and governance of the business. The SEC order revealed that every proposal approved by the DAO required the votes of Murray and Ward to achieve a quorum.
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, emphasized, “This case serves as an important reminder that those laws apply to all who wish to access our capital markets, regardless of whether they are, or purport to be, incorporated, decentralized or autonomous.”
