On December 22, 2023, the SEC issued a cease-and-desist order under Section 8a of the Securities Act of 1933, as amended (Securities Act) and Section 9(f) of the Investment Company Act Of 1940 (ICA) settling charges against BarnBridge DAO, a purported decentralized autonomous organization (DAO). In a separate but related cease-and-desist order, the SEC settled charges under Section 8a of the Securities Act and Section 9(f) of the ICA against BarnBridge's founders, Tyler Ward and Troy Murray.

The SEC claims that between March 2021 and May 2023, Ward, Murray, and BarnBridge (collectively, respondents), through the BarnBridge DAO website and application, offered to investors, including US investors, the opportunity to invest in so-called SMART Yield Pools of structured crypto-asset securities marketed as SMART Yield bonds, in violation of the Securities Act and the ICA.

The bonds were purportedly intended to allow investors to hedge the risks of investing in crypto on a blockchain-based lending platform using smart contracts. BarnBridge gave investors the opportunity to purchase senior or junior bonds through its website application. Senior bonds offered low but guaranteed yields, and junior bonds offered potentially higher but variable yields. The assets deposited by investors were used to generate the revenue for the pools to pay the senior bondholders. Each pool exchanged one type of crypto asset for newly minted crypto assets issued by the platform, which could be exchanged by the pool for a return of principal and interest, or, in certain cases, additional crypto assets that were issued to incentivize lending.

BarnBridge allegedly maintained the pools by using bond revenue to pay:

The SEC alleged that the founders acted as de facto executives and were involved in BarnBridge's day-to-day operations, including overseeing the:

Without admitting or denying the allegations and to settle the SEC charges, BarnBridge agreed to disgorge $1.457 million of proceeds from the sales and Ward and Murray each agreed to pay a $125,000 civil penalties to the SEC.

The SEC charged that respondents failed to register the offer and sale of the SMART Yield bonds as required under Sections 5(a) and (c) of the Securities Act. The SEC found that the SMART Yield bonds were fixed income debt securities in the form of a notes, which, under Reves v. Ernst & Young (494 U.S. 56 (1990)), are presumed to be securities unless the notes fall within certain judicially created categories of financial instruments that are not securities (See Practice Note, Exchange Act: Section 10(b) Jurisdictional Defenses: Identifying a Security: Promissory Notes). The SEC found that the bonds were notes because they promised a fixed or variable return based on the pool's performance. According to the SEC, the SMART Yield bonds did not fall within any of the enumerated Reves exceptions and no registration statement was filed or in effect for respondent’s offers and sales of SMART Yield products and no exemptions from registration were available. As a result, the SEC found respondents in violation of Sections 5(a) and 5(c) of the Securities Act.

The SEC also charged respondents with operating BarnBridge’s SMART Yield Pools as unregistered investment companies in violation of Section 7(a) of the ICA. From March 2021 to May 2023, the SEC asserted that BarnBridge operated the SMART Yield Pools, which engaged in the business of investing, holding, and trading certain assets that were investment securities, as defined under Section 3(a)(2) of the ICA.

The SEC also found the SMARTY Yield Pools to be investment companies under the ICA because:

Since respondents failed to register any of the SMART Yield Pools with the SEC as an investment company, the sales and delivery of unregistered SMART Yield securities to investors in the US violated Section 7(a) of the ICA.

According to the orders, respondents compared the SMART Yield bonds to asset-backed securities (ABS) and marketed them broadly to the public so that investors could purchase “senior” or “junior” SMART Yield bonds. SMART Yield then pooled the crypto assets deposited by investors, and BarnBridge used those assets to generate fixed or variable returns to pay the investors.