The U.S. Securities and Exchange Commission has talked recently about an ever-increasing scope of its jurisdiction — such as with respect to NFTs — and recently brought its first insider trading case dealing with cryptocurrencies.  But on August 16, 2022, the SEC brought a type of case that is similar to many others over that past five years.  It sued Dragonchain Foundation, Dragonchain Inc., the Dragon Company as well as founder and chief developer Joseph Roets in connection with an initial coin offering made during the 2017-18 heydays of ICOs.

The complaint is relatively standard fare for these type of cases.  It referenced the Howey decision and the SEC’s 2017 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act  of 1934: DAO.  The SEC alleges that, in 2017,  the defendants conducted an unregistered offering of Dragon tokens (“DRGN”) in two phases: (1) a discounted “presale” in August 2017 to members of a crypto investment club, and (2) an initial coin offering (“ICO”) in October and November 2017 marketed predominately to crypto investors. Through this offering, the defendants allegedly raised approximately $14 million from approximately 5,000 investors around the world, including the United States. According to the SEC’s complaint, the defendants marketed the offering to crypto investors, and their personnel and agents publicly discussed DRGNs investment value, pricing, and “listing” on trading platforms, among other things. Then, between 2019 and 2022, the defendants allegedly offered and sold approximately $2.5 million worth of DRGNs to cover business expenditures to further develop and market Dragonchain technology, some of which occurred after a state regulator found DRGNs to be securities.  According to the SEC, defendants violated the Securities laws because they undertook the distribution of DRGNs without registering its offers and sales with the SEC, as required by federal securities laws, and no exemption from registration applied.

The SEC’s investigation had been going on for years and, in an apparent surprise to Dragonchain, as the statute of limitation was about to run,  the SEC informed the company in April that it would be bringing charges.  Thus, even in advance of the filing of the SEC’s complaint, Dragonchain posted its defense to the SEC’s charges.

One of the main points that Dragonchain made is that, unlike so many of the other ICO cases brought  by the SEC, Dragonchain had an actual business and product prior to the time of the ICO.  It also noted how Dragonchain proactively sought the advice of IP and securities law focused attorneys prior to launch. And it filed for a provisional patent on the token model in August 2017.

Dragonchain also went through the four Howey factors and argued why they did not apply to its case.  For example, in connection with the first Howey prong — an investment of money — Dragonchain conceded that purchasers paid with Bitcoin or Ethereum, which could be classified as money.  But it did not agree that the purchase was an investment because it was literally a direct purchase of a utility token software micro-license which would be expected to be used as a utility.

The third Howey prong is the reasonable expectation of profit.  Dragonchain said that, during the sale period, it never promoted the purchase of the DRGN micro-license with the expectation of profit. To the contrary, the legal terms explicitly accepted by all purchasers of DRGN micro-licenses during the sale stated: “Offering the tokens with capped quantity and uncapped contribution will decrease the expectation of profit because an individual purchasing a token will not know the purchase price of that token until completion of the offering.”

Dragonchain founder, Roets, also included the following comment:

Many in the industry have had similar experiences and as a result have the impression that the SEC is picking and choosing projects to target, often singling out the ones with the biggest opportunity to disrupt incumbent interests, while giving a free pass to others. The commission is trying to shoehorn software technology into incompatible securities law from the 1930’s. This calls into question whether the Commission understands the technology enough to effectively regulate it.


David Zaslowsky has a degree in computer science and, before going to Yale Law School, was a computer programmer. His practice focuses on international litigation and arbitration. He has been involved in cases in trial and appellate courts across the United States and before arbitral institutions around the world. Many of David’s cases, including some patent cases, have related to technology. David has been included in Chambers for his expertise in international arbitration. He is the editor of the firm's blockchain blog.