Why Token-Based Voting Inevitably Collides with Securities Law

The SEC's framework is triggered by an investment of money in a common enterprise with an expectation of profits from the efforts of others. Delegated token voting creates a direct, on-chain record of that expectation.

• Profit Expectation: Governance votes directly on treasury allocation, fee switches, and tokenomics.
• Common Enterprise: The protocol's success is tied to the managerial efforts of a core team or delegates.
• Efforts of Others: Voters rely on delegates (or dev teams) for technical execution and strategy.

Major DAOs are already in the enforcement crosshairs by operating as unregistered securities exchanges or investment contracts.

• Uniswap Labs: Wells Notice highlights the UNI token's governance role in fee mechanism control.
• MakerDAO: Endgame Plan's SubDAOs and token distributions are a regulatory stress test.
• On-Chain Evidence: Every governance proposal and vote is a permanent, public record for regulators.

Voter apathy leads to centralized delegate power, creating a clear 'managerial class' that strengthens the securities case.

• Low Participation: Often <10% of tokens vote, concentrating power in a few whales or VC funds.
• Professional Delegates: Entities like Arbitrum's Delegate Race or Compound's Gauntlet are paid for managerial efforts.
• Regulatory Lens: This looks identical to a board of directors, undermining 'decentralization' defenses.

Retroactive airdrops are a de facto public offering that uses governance rights as the primary value proposition.

• Explicit Marketing: Projects promise 'future governance' to drive usage pre-launch.
• Investment Contract: Users provide value (liquidity, data) expecting a governance token reward.
• Blur, EigenLayer, etc.: Case studies where token utility is governance-first, creating immediate regulatory surface area.

The SEC's core argument: a token is a security if it represents an investment in a common enterprise with profits derived from the efforts of others. Governance rights are framed as a profit-seeking mechanism, not pure utility.\n- Key Precedent: SEC vs. Ripple established that programmatic sales to retail can be securities offerings.\n- Key Risk: Airdrops and liquidity mining distributions are scrutinized as unregistered securities sales.

The SEC's 2023 Wells Notice to Uniswap Labs is a landmark case targeting a dominant DEX. The argument hinges on UNI being an unregistered security because its value is tied to the protocol's managerial efforts.\n- The Signal: Regulators view governance over fee switches, treasury, and upgrades as security-like control.\n- The Fallout: Creates a chilling effect for US-based projects, pushing development and foundation activity offshore.

A practical example of legal pressure forcing structural change. Facing regulatory uncertainty, the Aragon Association dissolved its DAO and redeemed ANT tokens for ETH, effectively terminating its on-chain governance model.\n- The Lesson: When the legal cost of maintaining a token-based voting system exceeds its utility, projects will capitulate.\n- The Trend: Points towards non-token governance (e.g., Soulbound tokens, reputation) or fully off-chain legal wrappers.

Lido's stETH demonstrates a potential path: a pure utility token with no governance. Value accrues from fee-sharing, but control rests with a non-profit foundation and off-chain multisig. This deliberately avoids the "common enterprise" prong of Howey.\n- The Strategy: Decouple financial utility from formal governance rights.\n- The Limitation: Centralizes protocol upgrades and critical decisions, contradicting decentralization narratives.

The SEC's primary weapon. Granting voting rights over a protocol's revenue, treasury, or fees creates a direct financial incentive for token holders. This legally frames the token as an investment contract, not a utility. The more valuable the governance power, the stronger the securities claim.

• Key Precedent: Ripple's XRP ruling hinged on institutional sales with profit expectations.
• Key Risk: Uniswap, Aave, and Compound tokens are perpetually in the crosshairs.

Free distribution doesn't inoculate you. If the token's value is derived from the managerial efforts of a core team (e.g., developing V3, launching on new chains), and the airdrop is marketed to bootstrap a community of 'investors', the SEC argues you've created a security from day one. Retroactive airdrops are especially risky, as they reward past use with future governance/equity.

• Case Study: The Uniswap UNI airdrop is the canonical example of this legal gray zone.
• Builder Takeaway: Decentralization is a spectrum, not a binary switch you flip post-airdrop.

Decouple governance from financial upside. The Nouns DAO model uses NFTs for voting on treasury allocation and community projects, but the NFT's value is primarily cultural/social. The protocol itself (its contracts) is immutable and fee-less; governance controls a treasury, not revenue streams. This significantly weakens the 'expectation of profit' argument.

• Key Benefit: Aligns voting power with long-term community alignment, not speculation.
• Key Constraint: Limits protocol upgradability and fee model changes, favoring 'finished' code.

Cosmos, Solana, and other L1s treat staking tokens as the security—this is acknowledged and regulated as such. Governance is a secondary function of the staking asset. The legal clarity comes from embracing the security nature for consensus and layering governance on top. For app-chains, this means bifurcating tokens: a staking/secured token and a separate, non-financial governance token.

• Key Benefit: Clear regulatory lane for the staking asset; isolates governance risk.
• Key Example: dYdX moving to a Cosmos app-chain separates staking (DYDX) from its future governance utility.

VC funding for a 'decentralized' protocol is a fundamental contradiction under the Howey Test. The SEC will point to the founding team's and VCs' continued managerial efforts as evidence of a common enterprise. The more control investors have via token grants or board seats, the harder it is to argue decentralization. True decentralization requires the founding entity to exit.

• Key Conflict: VCs need a profitable exit, which often requires a token that looks like a security.
• Investor Takeaway: Model returns on protocol fees/treasury shares, not token appreciation.

The strongest legal argument is that token holders cannot prevent a competing team from forking the code and treasury. If governance is truly non-essential to the protocol's function and value (because anyone can fork it), the 'reliance on managerial efforts' prong of Howey weakens. This favors permissionless, forkable infrastructure (like Uniswap v3) over complex, managed vertical stacks.

• Key Benefit: Creates a legal moat based on credible neutrality and exit.
• Key Example: Uniswap's GPL license and numerous forks demonstrate this principle in action.