The SEC is Suing Dragonchain
The U.S. Securities and Exchange Commission has launched another lawsuit against a significant cryptocurrency project for selling unregistered securities.
This Tuesday, the SEC filed a suit against John Joseph Roets, chief architect of Dragonchain, for allegedly raising $16.5 million in unregistered "crypto asset” securities offerings. This filing follows the commission's recent claim that popular crypto exchange Coinbase had also listed unregistered securities on its platform in July.
According to the SEC, in 2017, Dragonchain and its foundation ran an unregistered offering of Dragon tokens ("DRGN") through a discounted "presale" for members of a crypto investment group via an initial coin offering (ICO).
An initial coin offering is a process that crypto companies use to raise money quickly as a project makes a new coin or currency and offers investors the opportunity to buy it before public release.
"Through this offering, the defendants allegedly raised approximately $14 million from approximately 5,000 investors worldwide, including in the United States," the SEC wrote. The SEC says DRGN, Dragonchain's native token, was marketed to crypto investors, touting the token's investment value, pricing, and "listing" on trading platforms.
The SEC claims that between 2019 and 2022, Dragonchain, The Dragon Company, and the Dragonchain Foundation offered and sold $2.5 million of DRGNs to cover business expenses and market Dragonchain.
Dragonchain was created in 2014 and is a self-described hybrid blockchain for “solving business problems at an enterprise scale.” At the time, Roets served as its chief developer. Dragonchain's origins allegedly began at the Walt Disney Studios in Seattle, Washington; the project became open source shortly after in 2016.
Just before the suit came to light, the company responded to the SEC with Roets pledging "to provide our clear argument for existence and demonstrate that the commission should not charge any of these parties with intentional or unintentional violation of U.S. securities laws."
"Many in the industry have had similar experiences and as a result have the impression that the SEC is picking and choosing projects to target, often singling out the ones with the biggest opportunity to disrupt incumbent interests, while giving a free pass to others," Roets wrote. "The commission is trying to shoehorn software technology into incompatible securities law from the 1930’s."
"This calls into question whether the commission understands the technology enough to effectively regulate it,” he added.
A 2021 court filing by the State of Washington backed up the SEC claims today as it stated that Dragonchain “is not currently registered to sell its securities in the state of Washington and has not previously been so registered." According to the filing, the company was fined $50,000 and issued a cease and desist order.
As per today's filing, the SEC says it seeks permanent injunctions, the return of wrongfully obtained profits, and civil penalties.
Suppose projects like Dragonchain can be the target of an SEC suit, a project with a smaller market cap than other prominent players. In that case, others who have also been called out for selling unregistered securities must be gearing up for a harsher crypto winter than expected.