American CryptoFed registration at risk as SEC alleges filing anomalies

Disclaimer: The article has been updated based on an official response from American CryptoFed DAO. COO Xiaomeng Zhou explained why the SEC is not legally allowed to issue a stop order.

American CryptoFed DAO, the first decentralized autonomous organization (DAO) to get legal recognition in the United States, is at risk of losing its registration after the United States Securities and Exchange Commission (SEC) dug up anomalies in the Form S-1 registration statement dated Sept. 17, 2021.

The Wyoming Secretary of State’s office recognized American CryptoFed as a legal entity in July 2021, at a time when the organization’s CEO, Marian Orr, believed that “Wyoming is arguably the top blockchain jurisdiction in the world.”

However, on Nov. 18, 2022, the SEC instituted administrative proceedings against the DAO to determine the issuance of a stop order. A stop order from the SEC would retract American CryptoFed’s registration and bar sales of in-house tokens, Ducat and Locke.

According to the SEC’s Division Of Enforcement, the Form S-1 registration statement filed by American CryptoFed lacks vital information such as audited financial statements and details about its business and management. The SEC further believed that the American CryptoFed filing contains “misleading statements and omissions” while being inconsistent in describing the tokens as securities.

In this regard, David Hirsch, chief of the enforcement division’s crypto assets and cyber unit, stated that:

“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 clarified that issuers must provide the required disclosure information to the SEC. However, the SEC claimed non-cooperation from American CryptoFed during its examination of its registration statement.

Based on the information made available to the public, Hirsch shared SEC intent regarding the DAO:

“The Enforcement Division is seeking to stop American CryptoFed’s registration to protect investors against misleading information.”

Speaking to Cointelegraph, American CryptoFed chief operation officer and organizer Xiaomeng Zhou argued against the SEC’s claims, stating that the Section 8(d) Order can only apply to effective Registration Statements. To the extent that Section 8(d) Order is applied to the Registration Statement, which “is pending and is not yet effective”, it is applied to the wrong subject matter and is unlawful because “the effectiveness of the registration statement” has not yet existed and the Section 8(d) Order can not stop the subject matter which does not exist, explained Zhou.

For the American CryptoFed DAO’s Form S-1 Registration Statement which “is pending and is not yet effective”, it is a subject matter of Refusal Order of Section 8(b) of the Securities Act of 1933 which clearly states “the Commission may, […] issue an order prior to the effective date of registration refusing to permit such statement to become effective until it has been amended in accordance with such order.

As a result, the American CryptoFed DAO’s Form S-1 is a subject matter of Section (a) and Section 8(b) of the Securities Act of 1933, according to Zhou. He added:

“The Section 8(b) of the Securities Act of 1933 only allows the SEC to issue a Refusal Order to provide further clear guidance for American CryptoFed DAO to complete the Form S-1 registration (not Stop Order).”

Zhou reiterated that Section 8(b) of the Securities Act of 1933 allows the SEC to issue a Refusal Order and provide clear guidance to complete the Form S-1 registration. However, it does not allow the federal agency to issue a Stop Order:

“As a result, the SEC abused the Securities Act of 1933 to unlawfully delay, stop and obstruct American CryptoFed DAO’s legitimate disclosure through the Form S-1 Registration Statement.”

Cointelegraph found that the official Telegram channel for the DAO has been disabled.

However, the deletion of the Telegram account was not yet linked to the SEC’s investigation at the time of writing.

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