On November 18, 2022, the U.S. Securities and Exchange Commission issued an order instituting administrative proceedings against American CryptoFed DAO LLC (“American CryptoFed”), an issuer of digital assets, to determine whether a stop order should be issued denying or suspending the effective date of the registration of the Ducat and Locke tokens (the “Tokens”) under the Securities Act of 1933 (the “Securities Act”).

The SEC’s Enforcement Division (“Enforcement”) alleges that American CryptoFed’s Form S-1 registration statement filed on September 17, 2021 failed to contain required information about American CryptoFed’s business, management, and financial condition, such as audited financial statements, and contained materially misleading statements and omissions, including inconsistent statements about whether the Tokens are securities. Enforcement further alleges that American CryptoFed failed to cooperate during its examination of their registration statement.

This latest salvo in the American CryptoFed saga comes on the heels of the Commission’s September 2022 Order declining Enforcement’s request to accelerate enforcement proceedings against American CryptoFed with respect to its filings under the Securities Exchange Act of 1934, after American CryptoFed brazenly taunted the SEC that, despite pending SEC enforcement proceedings, it planned to proceed with implementing its business plan to conduct auctions for non-fungible tokens exchangeable for Locke tokens, unless Enforcement provided it with a Cease-and-Desist Order and a Howey Test Analysis or other legal justification proving that the Locke and Ducat tokens are securities. In issuing its earlier order the Commission found there was no immediate need to expedite the resolution of the Section 12(j) proceeding, as American CryptoFed would be acting “at its peril” if it began  to distribute the tokens given the open and unresolved issues with respect to its filings under the Securities Act. You can read more about the SEC’s prior order in our earlier blog post on the subject.

Through this current action, Enforcement hopes to suspend the registration of the offer and sale of the Ducat and Locke tokens under the Securities Act.  David Hirsch, Chief of Enforcement’s Crypto Assets and Cyber Unit was quoted in the SEC’s press release as follows: “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.”

In a rare move, the SEC decided to broadcast the administrative proceeding via live webcast on the SEC website.

American CryptoFed has chosen to represent itself in this enforcement proceeding, acting without counsel. Over the first two days of the hearing, American CryptoFed argued that the SEC has treated it unfairly by choosing to accelerate enforcement proceedings, without providing American CryptoFed an opportunity to first work through its filings and resolve any issues with the Division of Corporation Finance (“Corp Fin”). American CryptoFed has also asked the administrative law judge (“ALJ”) for an opportunity to directly question members of Corp Fin and Enforcement who were responsible for making such decisions. Further, American CryptoFed argues that the issues the SEC complains of, with respect to inconsistencies and/or incomplete information in its filings, are not an attempt by American CryptoFed to mislead or misinform investors but, rather, are the result of the SEC’s forms and questions being confusing and/or inapplicable to American CryptoFed’s DAO structure and token issuances generally. For example, as a DAO with no current management, operations, assets or revenues, American CryptoFed claims to have no information to provide regarding its business, management, and financial condition. American CryptoFed has argued that it was merely trying to comply with the SEC filing requirements and respond to the SEC’s questions as best it could and therefore it should have had an opportunity to work with Corp Fin to resolve any issues with respect to the filings prior to being subjected to an enforcement action. The Enforcement Division obviously takes a very different view – including that American CryptoFed was non-cooperative and non-responsive in its various interactions with the SEC. Enforcement has also suggested that American CryptoFed’s business plan resembles a Ponzi scheme.

The SEC appears to be trying to make an example of American CryptoFed by putting the proceedings online. However, there is also reason to believe that American CryptoFed may believe there is some advantage to shining a light on its treatment by the SEC. It is not clear who has the upper hand at this point. Also of interest, according to American CryptoFed’s website, the Ducat and Locke tokens will be issued pursuant to the Token Safe Harbor Proposal 2.0 outlined by SEC Commissioner Hester Peirce. Of course, that “proposal” is not currently the law.  One gets the sense that this entire exercise could be just a test case for either or both of the parties, though, at the same time, one cannot help but wonder if either side has sufficiently considered the impression they might be making on the public.   Either way, the case is worth monitoring because it could influence the framework for how future token offerings are handled.


Andrew Zuckerman is a member of Baker McKenzie's Financial Regulation and Enforcement Practice Group, which provides our clients with a full range of regulatory advice and enforcement counseling from both a US and global perspective.