SEC Sues Dragonchain for Unregistered Initial Coin Offering

The creator of Dragonchain is the subject of a complaint from the U.S. Securities and Exchange Commission for allegedly generating millions via unregistered offers of crypto asset securities.

More precisely, John Joseph Roets and the three companies he controls, Dragonchain, the Dragonchain Foundation, and The Dragon Company, are being sued by the SEC for failing to properly disclose more than $16 million in offers of crypto asset securities over a five-year period.

Offerings of Crypto Asset Securities Not Registered

Roets, Dragonchain, and the Foundation carried out an unregistered selling of Dragon tokens (DRGN) via a reduced presale to members of a cryptocurrency investing club, according to a complaint in the U.S. District Court for the Western District of Washington.

The SEC further asserts that Roets and the three Dragonchain corporations violated the Securities Act in 2017 by raising millions of dollars through the sale of Dragon tokens in an ICO that was primarily targeted at cryptocurrency investors.

The Seattle-based Dragonchain, an enterprise blockchain start-up that was first created in 2014 at Disney's tech-focused Seattle office, is accused by the SEC of using the funds to fund its marketing and development efforts.

According to the SEC, $2.5 million worth of DRGNs were offered and sold between 2019 and 2022 by Dragonchain, the Dragonchain Foundation, and The Dragon Company to pay for business expenses and promote Dragonchain.

Coin Offering in I.C

The SEC contends that both the 2017 presale and the initial coin offering of Dragon tokens were unregistered crypto asset securities offerings that purportedly garnered $14 million from more than 5,000 investors. This assertion is a key part of the lawsuit.

Many cryptocurrency start-ups turned to initial coin offerings (ICOs) during the end-of-2017 market surge for Bitcoin (BTC) in order to raise capital for their tokens. In reality, initial coin offerings surpassed venture money as the primary means of funding for blockchain start-ups at their height in 2017.

A blockchain-based start-up may produce a set amount of its own native digital token in order to sell them to early investors, often in exchange for other cryptocurrencies like Bitcoin or Ethereum. This is known as an initial coin offering (ICO) (ETH).

The SEC, however, argues that federal securities legislation and information disclosure should apply to token sale securities. The DRGN token was classified as a security in a 2021 court filing by the State of Washington, and since Dragonchain was not registered to market its securities, the firm was fined $50,000 and given a stop and desist order.

The business, however, insists that DRGN is not a financial security. The SEC has now requested disgorgement of the gains plus prejudgment interest and a civil monetary penalty, claiming that it is seeking permanent injunctions.