The US Securities and Exchange Commission (SEC) has filed a complaint against Dragonchain, a blockchain venture that allegedly failed to register US$16.5 million in digital asset sales over a period of five years:
Unregistered Securities Here, There and Everywhere
The term “securities” refers to tradeable financial assets, and under US securities law a company may not offer or sell securities to the public unless the offering has been registered with the SEC. Registered offerings are subject to a plethora of laws and regulations that purport to protect investors.
Full disclosure is one of the core elements required within a public listing, designed to help investors make informed choices, and this is typical not just in the US but across virtually all capital markets.
Some of the required information to be disclosed includes the history of the company and its founders, shareholding structure, financial statements, executive compensation, risk factors (both current and future), management’s explanation of operations, and any other material facts relevant to the offering.
Michael Saylor, as well as current SEC chairman Gary Gensler, are of the opinion that the vast majority of tokens constitute unregistered securities, and the regulator’s actions are beginning to gain steam. Already this year we’ve witnessed a veritable feast of lawsuits and probes relating to unregistered securities, most notably against Coinbase.
Dragonchain Flies Too Close to the Sun
The complaint alleges that chief executive John Roets violated securities laws by raising millions of dollars from the sale of Dragon (DRGN) tokens in an initial coin offering (ICO) in 2017. The firm then diverted the proceeds into marketing and development:
Dragonchain undertook its distribution of DRGNs without registering its offers and sales of DRGNs with the SEC as required by the federal securities laws, and no exemption from this requirement applied.
SEC complaint
“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 argues that DRGN was marketed to crypto investors by touting the token’s investment value, pricing, and “listing” on trading platforms.
Despite marketing itself as a hybrid blockchain for “solving business problems at an enterprise scale”, Dragonchain has to date demonstrated little to any real-world value.
Interestingly, this isn’t the firm’s first encounter with authorities. In 2021, a court filing by the State of Washington also called DRGN tokens a security, arguing the firm was “not currently registered to sell its securities in the state of Washington and has not previously been so registered”.
Dragonchain was subsequently fined US$50,000 and issued with a cease and desist order. The SEC is now looking to follow suit by seeking a permanent injunction, the return of what it believes are wrongfully obtained profits, and civil penalties.
Dragonchain appears to have embraced regulatory arbitrage to circumvent laws designed for investor protection. Bitcoiners such as Saylor would likely argue it is but one, and there are around 20,000 remaining:
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