On Tuesday, March 21, Sushi DAO, the decentralized autonomous organization behind the popular Ethereum-based decentralized exchange (DEX) SushiSwap, revealed that the U.S. Securities and Exchanges Commission (SEC) had served the company and its CEO Jared Grey with a subpoena.
Sushi DAO Sets Up Fund To Fight Enforcement Action
In response to a possible enforcement action by the regulator, the Sushi team submitted a proposal to its DAO to establish a Legal Defense Fund to cover all legal costs for its core contributors. The team noted that they are cooperating with the SEC and do not wish to comment on the ongoing investigation.
In the proposal, Grey wrote that the team is asking the Sushi DAO to make available a legal defence fund of $3 million in USDT due to the lack of an international regulatory environment for DAOs and limited options for insurance policies.
The CEO, who was assigned to the ‘head chef’ role in October 2022, said the fund covers the legal costs related to inquiries, litigation, and other issues targeting the protocol’s core contributors who have been active since the ratification of Sushi 2.0.
In March of last year, Sushi sought to form a legal entity called the Sushi Legal Structure to reduce liability for contributors and the DAO to handle legal matters.
The 3 million USDT will be stored in a designated multi-sig wallet, and the funds will only be made available for the lawsuit. The CEO said the funding was necessary to continue the operations of the decentralized exchange and protect its core contributors.
According to the proposal, the $3 million Legal Defense Fund will make payments until the legal proceedings conclude. The disbursements will continue even if a contributor resigns or is terminated during the procedure. Gary also mentioned that if the funds are depleted while the proceedings are ongoing, the DAO will make 1 million USD available. Core contributors will submit a full financial disclosure to the Sushi DAO in the second quarter of 2023.
To limit the financial burden on the DAO to provide the legal expenses while maintaining the company’s solvency, Sushi has asked for 50% of the funds to be derived from the platform’s Kanpai fees, 35% from grants offered to the company, and 15% from SUSHI token sales.
75% of voters voted in favour of establishing the Legal Defense Fund, while 24% did not agree. Since it’s only been a day since the proposal was submitted to the DAO, the outcome is yet to be disclosed.
Rival decentralized finance (DeFi) protocol Maker submitted a similar proposal to its DAO in December 2022 to establish a $5 million Defense Fund that will allow the company to pay for legal expenses if they become a target of legal or regulatory action. The fund was denominated in Maker’s algorithmic stablecoin DAI.
‘Test 1’, a member of the Sushi DAO, commented that the SEC targeted Jared because he was the only way they could get to a decentralized entity like Sushi. The member also joked about the CEO dedicating his life to crypto and deciding to live in the U.S., where regulators are hunting down crypto firms. Other members have asked Sushi to post the subpoena to get more information on the case.
SEC Targeting DAOs And Crypto Firms In The United States
This isn’t the first time U.S. regulators have gone after a DAO. In September 2022, the Commodities Futures Trading Commission (CFTC) filed a lawsuit against Ooki DAO, the organization behind the decentralized finance platform Ooki Protocol, claiming that the entity illegally offered crypto derivatives products to investors. In a similar case, the SEC sued CryptoFed DAO, a legally recognized DAO operating from Wyoming.
However, in December, a Californian court ruled that federal regulators can only serve a legal notice to specific individuals connected to the DAO who reside in the United States and not sue the DAO as a whole. Sushi CEO Jared Grey is said to be based near Tampa Bay, Florida.
In recent months, the SEC has been on a rampage to bring crypto service providers under its control. In January, the regulator imposed a $30 million fine on the cryptocurrency exchange Kraken for violating federal securities laws with its crypto asset staking product.
Last month, the financial watchdog charged Terraform Labs founder Do Kwon with securities fraud involving the company’s collapsed algorithmic stablecoin Terra USD and the LUNA token.
In anticipation of possible regulatory action against the company, Sushi shut down its crypto lending product in January, focusing entirely on its DEX offering – SushiSwap. The platform is one of the leading decentralized exchanges on Ethereum in terms of trading volume.
SUSHI prices suffered after the news broke out but have since recovered. At the time of writing, SUSHI is trading at $1.16 – down by 1% in the last 24 hours.