Dragonchain, a cryptocurrency company based in Bellevue, Wash., was sued Tuesday by the Securities and Exchange Commission on allegations that it engaged in the illegal sale of unregistered securities through its 2017 initial coin offering and subsequent sales of its DRGN tokens totaling $16.5 million.
The company, founded in 2017 by a former Walt Disney Co. blockchain architect, has denied the allegations in previous statements anticipating the SEC lawsuit.
It’s the latest cryptocurrency company to face such allegations from the SEC, which asserts that certain crypto assets fit the legal definition of securities, requiring greater levels of federal regulation and scrutiny than commodities do.
Dragonchain’s founder and CEO, John Joseph “Joe” Roets, is named as a defendant in the suit along with three affiliated companies and organizations: Dragonchain Inc., Dragonchain Foundation, and The Dragon Company.
“Because Dragonchain never filed a registration statement for its offer and sale of DRGNs, it never provided investors with the material information that other issuers include in such statements when soliciting public investment,” the SEC alleges in the 17-page complaint, filed Tuesday in U.S. District Court in Seattle.
That allowed the company to operate in “an information vacuum,” selling the tokens “into a market that possessed only the information Dragonchain chose to share about DRGNs,” the suit alleges.
The suit did not catch Dragonchain by surprise. After more than four years of communications, the SEC informed Dragonchain on April 27 that investigators would recommend pursuing Dragonchain for the alleged sale of unregistered securities, according to a May 24 post by Roets that linked to a lengthy pre-emptive defense.
That defense said, in part, “Purchasers of the DRGN micro-license did so knowing and legally acknowledging that the DRGN was a software utility license to be used on the Dragonchain platform and did not in any way represent shared equity or ownership in Dragonchain, the Dragonchain platform, or any other related IP.”
Roets also wrote at the time, “We are confident that we have a very strong case against any such charges should they be filed. We are also confident that this will not affect ongoing business or any other project plans.“
Update: Dragonchain issued this response to the lawsuit Wednesday morning.
We are, of course, disappointed by the Commission’s decision. We’ve been consistent about the token model and utility as a software license since the beginning, when we filed for a patent on the model which was later granted by the USPTO.
Much of the complaint appears to be based on misunderstandings of the technology and the facts, for which we do not fault them as they are not software engineers or developers. We are still reviewing the complaint.
Details and information on our history, architecture, token model, and vision can be found in our response letter to the SEC dated May 19th.
After the SEC suit was filed, news site Crypto Briefing published an investigative report Tuesday afternoon about Dragonchain based on interviews with former employees and others connected with the company.
Update: Dragonchain issued a response to the Crypto Briefing report.
The push to treat certain crypto assets as securities also led the SEC to file a lawsuit in July against a former Coinbase employee in Seattle who was charged separately with insider trading of cryptocurrency. Many involved in the crypto industry assert that such assets should be treated as commodities, not securities.