sec sues dragonchain

The United Securities Securities and Exchange Commission (SEC) has filed a complaint against Dragonchain for the alleged sale of unregistered crypto asset securities in 2017 in what is considered the latest move from the agency to treat cryptos as such.

According to the press release published by the SEC yesterday in which it summarizes the rationale of the case, the agency claims that John Joseph Roets and three entities related to Dragonchain raised $16.5 million from investors through an initial coin offering (ICO) and violated US securities laws as none of the companies appropriately registered the instrument with the regulator.

This includes a pre-sale launched between October and November 2017 that raised as much as $14 million from around 5,000 investors across the globe and the sale of $2.5 million worth of DRGN – the native token of the Dragonchain blockchain – that were used to cover the business’s operating expenditures.

“Dragonchain undertook its distribution of DRGNs without registering its offers and sales of DRGNs with the SEC as required by federal securities laws, and no exemption from this requirement applied”, the 17-page claim filed with the Western District Court of Washington DC stated.

The SEC Justifies Its Decision to Treat DRGN as a Security by Citing a 2017 Report

In this particular case, the SEC cited a report published on 2017 where it stated that companies that use distributed ledger or blockchain technology for raising capital have to take appropriate steps to comply with US securities laws. This is the criteria the agency appears to be adopting to treat certain crypto assets as securities.

An ICO is similar to an initial public offering (IPO) for stock. It is a procedure through which the developing team of a blockchain project can raise capital to further build their proposed initiative by selling the native token of the network. In this case, DRGN.

With this claim, the SEC is seeking to ban both the three entities mentioned in the lawsuit and the founder of the project from being able to participate, offer, market, or otherwise be involved in any way in the offering of crypto assets deemed as securities.

In addition, the regulator is also seeking the return of what they have qualified as “ill-gotten gains” resulting from the activities cited in the complaint.

Dragonchain Was Already Expecting the Lawsuit

The developing team of this enterprise blockchain has already been expecting the lawsuit as indicated by several forum posts and tweets. In late April this year, John Joseph Roets posted on the project’s public forum a response to the SEC’s allegations.

In this post, he mentioned that the three entities listed in the lawsuit were notified that the SEC recommended “to charge the parties with the sale of unregistered securities in 2017”.

In regards to the agency’s decision to classify DRGN as a security, Roets stated that the developing team “never had an opportunity to present the case that the DRGN is a software license and utility token versus a financial security”.

“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”, the founder concluded.

The case against Dragonchain resembles a similar complaint filed by the SEC against the Chief Executive Officer of XRP in which the agency alleges that the entity and its founder marketed as much as $1.3 billion in unregistered securities through the sale of the network’s native token XRP.

In addition, the SEC recently started an investigation against Coinbase for the alleged offering of unregistered securities on its trading platform. The SEC has not commented if it will take legal action against the US-based crypto exchange.

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