Why the SEC Views Most DAO Tokens as Unregistered Securities

The SEC argues token sales are capital raises. Purchasers exchange ETH/USDC for tokens, funding protocol development and operations.

• Primary Sales are direct evidence of investment.
• Secondary Market Trading is treated as a continuation of the original offering.
• The Common Enterprise is the protocol's success, which the token's value is tied to.

Marketing and tokenomics are the SEC's smoking gun. Promises of 'staking rewards', 'buybacks', or 'value accrual' frame the token as an investment contract.

• Governance as a Facade: If profit motive dominates, voting rights are insufficient to escape security status.
• Founder & VC Promotions: Public statements about 'building the next Ethereum' are used as evidence.
• Referenced Cases: LBRY, Telegram, and Kik set precedent for this argument.

Decentralization is a spectrum, and most DAOs fail the test. The SEC targets active founding teams and core developers whose managerial efforts are essential for profit.

• Ongoing Development: Treasury control and roadmap execution by a concentrated group.
• The 'Sufficiently Decentralized' Myth: Ethereum and Bitcoin are benchmarks almost no new DAO meets.
• The Achor Protocol Ruling: A textbook case where token value was tied to a central team's development of a yield product.

The Wells Notice to Uniswap Labs is the SEC's most aggressive move, arguing the UNI token and even the interface are securities. This expands the battlefield.

• Protocol vs. Interface: Attacking the front-end sets a dangerous precedent for all dApps.
• Retroactive Application: Targeting a token launched years ago creates regulatory uncertainty.
• The Broader Implication: If UNI fails, every major DeFi governance token from Aave to Compound is at risk.

The primary legal counter-argument, modeled after Filecoin and early Ethereum. The token must be sold as a consumptive access key, not an investment.

• Functional Utility: The token must be required to use the core service (e.g., gas, storage).
• No Profit Promises: Marketing must focus on utility, not price appreciation.
• Immediate Use: Sale proceeds should fund a finished or near-finished product, not future development.

The SEC's campaign forces a structural shift. Projects are migrating governance or incorporating offshore to avoid U.S. jurisdiction.

• Foundation Models: Lido, Aave use Swiss or Cayman Islands foundations to insulate developers.
• SubDAO Proliferation: Delegating specific functions (e.g., MakerDAO's Spark) to limit liability.
• The Future: True on-chain, anonymous governance may be the only viable long-term model, sacrificing institutional participation.

The SEC applies the 1946 Howey Test to token sales, focusing on the expectation of profit from a common enterprise. Early-stage marketing, VC fundraising rounds, and centralized development teams create a prima facie case for security status that is nearly impossible to unwind post-launch.

• Key Risk: Pre-launch hype and promises are permanent liabilities.
• Key Insight: Airdrops to active users can be a defense, but secondary market trading often re-triggers scrutiny.

The SEC's Wells Notice to Uniswap Labs targets the UNI token as an unregistered security, despite its utility for governance. The argument hinges on the initial distribution and marketing, not the token's current decentralized function. This creates a regulatory paradox: a token can be sufficiently decentralized for the CFTC (as seen in the Ooki DAO case) but still a security for the SEC.

• Key Risk: Builder liability for a token's entire lifecycle.
• Key Insight: The legal entity behind development is the primary target, not the protocol itself.

The oft-cited escape hatch from SEC jurisdiction is a myth with no clear legal definition. The SEC has never formally blessed a token as 'decentralized enough'. Cases against LBRY and Ripple show that even with functional utility, the initial sale structure dominates the analysis. True decentralization requires no essential managerial efforts from a central party—a bar almost no project meets at launch.

• Key Risk: VCs and founders remain liable long after 'decentralization'.
• Key Insight: Functional decentralization is a defense in court, not a pre-approval from the SEC.

You cannot guarantee a token isn't a security, but you can minimize attack vectors. Avoid promises of profit, structure airdrops as user rewards for past actions, and accelerate protocol governance handover. Look to MakerDAO's MKR or Curve's veCRV model, where token utility is inextricably linked to core protocol function from day one.

• Key Action: Document everything as a utility-driven ecosystem, not an investment.
• Key Action: Isolate the founding legal entity from the token's financial performance.