SEC Continues to Ramp Up Enforcement on Crypto

Kramer Levin Naftalis & Frankel LLP

The Securities and Exchange Commission (SEC) kept up with their plan to increase enforcement on the sale of crypto assets in filing a complaint against Dragonchain for engaging in an unlawful offer and sale of securities in violation of the Securities Act of 1933. Dragonchain advertises itself as “[t]he Most Secure and Flexible Blockchain Platform on Earth” and that it is used to build blockchain applications. The SEC complaint individually names Joe Roets, the founder of Dragonchain, as well as the Dragonchain-related entities of Dragonchain Inc., The Dragon Company and the nonprofit Dragonchain Foundation as defendants. Dragonchain was notified in advance of the investigation, and its founder responded with an open letter to the SEC.

The SEC alleges that in 2017, various entities and people related to Dragonchain conducted an unregistered offering of “Dragon tokens” (or DRGN) where they raised approximately $14 million from thousands of investors around the world, including investors in the United States. The SEC further contends that Dragonchain marketed these tokens as securities because, among other things, they promoted that the investment value of Dragon tokens “would rise as the Dragonchain ‘ecosystem’ matured” and that the Dragon tokens would be listed on trading platforms. The SEC further alleges that Dragonchain and other entities then offered and sold approximately $2.5 million worth of Dragon tokens to cover business expenditures to further develop and market their Dragonchain technology. The SEC complaint concludes that Dragonchain distributed its sale of Dragon tokens without registering them with the SEC as required under federal securities laws. Given the SEC’s ramping up of personnel for enforcement of these types of token issuances, we can expect to see more enforcement on the horizon, including for tokens that have been traded for years, which is the case with the Dragon token.

The SEC’s statement on the action can be found here.

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