SEC Sues Dragonchain for Unregistered Initial Coin Offering
- The SEC claims that three entities failed to register more than $16 million in crypto asset securities offerings.
- The regulator alleges that the Securities Act of 1933 was violated.
- Dragonchain maintains that DRGN is not a financial security.
The U.S. Securities and Exchange Commission has filed a complaint against Dragonchain’s founder for allegedly raising millions in unregistered crypto asset securities offerings.
More specifically, the SEC is suing John Joseph Roets and the three entities he controls, Dragonchain, the Dragonchain Foundation and The Dragon Company, for failing to register more than $16 million in crypto asset securities offerings over the course of five years.
Unregistered Crypto Asset Securities Offerings
According to a filing in the U.S. District Court for the Western District of Washington, Roets, Dragonchain and the Foundation conducted an unregistered offering of Dragon tokens (DRGN) through a discounted presale to members of a crypto investment club.
In addition, the SEC alleges that Roets, along with the three Dragonchain entities, violated the Securities Act by raising millions of dollars from the sale of Dragon tokens in an initial coin offering (ICO) predominantly marketed to crypto investors in 2017.
The SEC claims that Seattle-based Dragonchain, which is an enterprise blockchain start-up that was originally developed at Disney’s tech-focused Seattle office in 2014, funnelled the money into its marketing and development campaigns.
Overall, the SEC alleges that between 2019 and 2022, Dragonchain, the Dragonchain Foundation and The Dragon Company offered and sold $2.5 million worth of DRGNs to cover business expenditures and to market Dragonchain.
Initial Coin Offering
A crucial element of the filing is that the SEC claims both the 2017 presale and the initial coin offering of Dragon tokens were unregistered crypto asset securities offerings that allegedly raised approximately $14 million from over 5,000 investors.
During the Bitcoin (BTC) market boom at the end of 2017, a number of crypto start-ups delved into ICOs as a means of raising money for their tokens. In fact, at their peak in 2017, initial coin offerings overtook venture capital as the main fundraising method for blockchain start-ups.
An ICO is a method of fundraising capital for early-stage cryptocurrency projects whereby a blockchain-based start-up will mint a certain quantity of its own native digital token in order to offer them to early investors, normally in exchange for other cryptocurrencies such as Bitcoin or Ethereum (ETH).
However, the SEC contends that token sale securities should be subject to federal securities law and information disclosure. A 2021 court filing by the State of Washington also called the DRGN token a security and due to Dragonchain not being registered to sell its securities, the company was fined $50,000 and issued a cease and desist order.
However, the company maintains that DRGN is not a financial security. The SEC, which says it seeks permanent injunctions, has now demanded disgorgement of the proceeds with prejudgment interest and a civil monetary penalty.