- As soon as one in all crypto’s most hyped initiatives, ICO-era startup Dragonchain and its founder have been charged as we speak by the SEC for the sale of $16.5 million in unregistered securities.
- The costs comply with years of alleged mismanagement and reportedly tyrannical management beneath CEO Joe Roets, whom workers declare managed the corporate with “concern and intimidation.”
- Dragonchain’s lavish spending and poor monetary administration shortly resulted within the undertaking’s deterioration and drew the eye of regulators within the U.S.
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Dragonchain as soon as had huge ambitions to convey the “magic of blockchain know-how” to companies across the nation. At this time, the Securities and Change Fee is charging the undertaking and its founder, Joe Roets, with having bought $16.5 million in unregistered securities from 2017 to 2022. Crypto Briefing takes a deep dive into the startup’s rise and fall.
The Dragon Awakens
Dragonchain was initially developed in 2015 from one of many Walt Disney Firm’s incubators because the Disney Personal Blockchain Platform. That’s till the architect behind the undertaking, John Joseph Roets (who goes by “Joe” Roets), went rogue, in keeping with his early collaborators.
Roets spun the undertaking out as a non-profit, wresting management of the mental property and model from Disney and reducing ties along with his former collaborators completely. In August of 2017, Dragonchain Inc. was introduced, a for-profit startup eager on cashing in on the cryptocurrency mania.
The startup aimed to construct a “turnkey blockchain platform for enterprise.” Like many opponents, it promised “safety and suppleness unseen available in the market,” positioning Dragonchain for “exponential development.”
Dragonchain introduced it will elevate cash by promoting its personal cryptocurrency, known as “Dragon tokens.” Moreover, past constructing its personal know-how to compete with different enterprise blockchains, like Hyperledger and R3, Dragonchain sought to kind an incubator to assist different startups elevate their very own rounds on the Dragonchain platform.
Shortly after asserting the launch of its for-profit company, Dragonchain held two preliminary coin choices, or ICOs. Enthusiasm across the sale was great, with buyers from Asia to Europe excited by Disney’s potential involvement, regardless of the undertaking now not having any affiliation with the media big.
Profiting from the identify affiliation, Dragonchain was capable of elevate over $15 million in Bitcoin and Ethereum over the course of 4 months. On the insistence of Roets, participation within the sale was out there to anybody on the planet with out restrictions.
Because of surging cryptocurrency costs, the startup’s hoard was value over $50 million by December. At its peak in January 2018, Dragon tokens have been value over $5 every, giving the corporate a valuation of over $1.2 billion.
Spending the Treasure Hoard
On the again of the profitable fundraising, Dragonchain was capable of extra than simply develop its workforce and open a brand new workplace. It generously sponsored lots of the newly sprouted blockchain conferences and occasions in Washington state, in addition to funding one in all its personal—Blockchain Seattle. The startup even helped fund the formation of the Washington Expertise Trade Affiliation’s Cascadia Blockchain Council (WTIA), the place Joe Roets sits as a steering committee member.
Different expenditures have been just a little extra lavish. Dragonchain’s non-profit bought a penthouse value $2.2 million atop the Bellevue Pacific Tower to entertain purchasers and buyers. In July 2018, it sponsored NASCAR Cup Sequence driver Corey LaJoie in Daytona. In 2019, the startup commissioned a media firm to provide a documentary collection about Dragonchain.
Regardless of the spectacular spending, nonetheless, it wasn’t lengthy after Dragonchain’s token sale earlier than hassle started.
The Downside with ICOs
After its profitable raises, Dragonchain needed to assist different blockchain initiatives elevate their very own multi-million greenback rounds. Inside months, it signed on tens of startups seeking to elevate cash.
Not less than one firm was capable of elevate cash on high of the Dragonchain platform. Look Lateral, an organization making an attempt to promote shares of artwork by means of cryptocurrency, held a token sale facilitated by Dragonchain in 2018.
Nevertheless, round this time, regulators started scrutinizing the untamed ICO scene. Many of those token gross sales have been unregistered securities choices, in keeping with pointers from regulators.
These guidelines, enforced by the Securities and Change Fee (SEC), make sure that buyers obtain constant and correct monetary details about the businesses they spend money on. The regulator is especially vigilant about securities investments provided to most people.
Round 2017, the SEC began ramping up its cryptocurrency choices enforcement. In December 2017, the Fee issued its first cease-and-desist proceedings in opposition to an organization promoting tokens issued on a blockchain.
By 2018, the regulator continued to tighten enforcement. That yr, it halted a number of fraudulent choices, shut down an unregistered cryptocurrency trade, and even charged boxer Floyd Mayweather Jr. and music producer DJ Khaled for unlawfully selling ICOs.
However, Joe Roets was voracious when it got here to fundraising, pushing firms to lift cash by means of Dragonchain whereas the market was nonetheless sizzling, stated Brandon Kite, the previous software program improvement lead at Dragonchain. “However there’s no means anyone might use Dragonchain for that stuff legally, that’s why they don’t have any prospects,” Kite stated. Two former executives on the firm have gone so far as to say that Roets and two different workers have been instantly subpoenaed by the SEC in 2019. Crypto Briefing confirmed this date after one supply shared the subpoena they acquired from the SEC.
The scrutiny had an influence on enterprise. For instance, blockchain identification startup LifeID was one of many startups that thought of becoming a member of Dragonchain’s incubator. The founding father of the corporate, Chris Boscolo, informed Crypto Briefing that his firm had been in negotiations to conduct an ICO by means of Dragonchain in late 2017. However, primarily based on steering from his authorized counsel, he was informed to restrict the providing to accredited buyers so as to stay in compliance with securities legal guidelines.
That’s when the deal broke down with Dragonchain. Based on Boscolo, the corporate knowledgeable him that they have been solely thinking about supporting his token sale if there have been no restrictions on who might take part—identical to Dragonchain’s personal ICO.
The insistence would show to be a dealbreaker. “LifeID has determined to comply with the steering of their authorized workforce and due diligence for his or her ICO. Upcoming presale has been canceled,” said Dragonchain on social media.
Ruling By Concern
Crypto Briefing interviewed greater than 10 workers on the firm and reached out to greater than 30 folks related to the corporate in whole. Many declined to remark, eager to keep away from litigation or harassment. Those who did converse stated that the Roets’ managed the corporate by means of “ concern and intimidation,” with some describing the expertise as “traumatic.”
In conversations with former workers, many cited the identical purpose for leaving—their poor therapy by Joe Roets and his spouse, Shirly Roets, who was second in command.
Chin-One Chan, Dragonchain’s Advertising Supervisor for Asia throughout its ICO, spoke with Crypto Briefing about her work at Dragonchain. Three months into her engagement, she claimed that Dragonchain tried to coerce her into signing a non-disclosure settlement after she raised considerations about guarantees made to her previous to the ICO. When she refused, Dragonchain fired her and withheld her wages together with Dragon tokens she was purported to obtain for the work she performed, in keeping with Chan.
One other worker alleged that after they have been fired, the corporate tampered with their W-2 filings with the IRS and three colleagues in an alleged try to extend their tax invoice as punishment.
A number of workers additionally stated they’d Dragon tokens promised to them for his or her work that was “clawed again.” A complete of 20% of Dragon tokens issued have been allotted to founders and early workers, just like inventory choices. Certainly one of these workers confirmed Crypto Briefing an employment settlement detailing their allocation of tokens.
Staff stated they have been requested to return these tokens for tax functions and that they’d be returned at a later date. They declare to have by no means acquired them, and once they pressed Dragonchain concerning the tokens, the corporate used it as negotiating leverage or just didn’t distribute them in any respect. Transactions on the blockchain line up with tales from these workers.
Not solely would the corporate try and intimidate folks financially, however Dragonchain would additionally achieve this legally. “Joe Roets is litigious, to say the least,” stated one former worker. Greater than two workers concerned with the corporate stated that Joe Roets initiated “frivolous lawsuits” in opposition to them after they left.
One placing instance of the situations at Dragonchain is from a former government, who spoke with Crypto Briefing on situation of anonymity. They stated that after elevating considerations about “inconsistencies” in Dragonchain’s funds, Joe Roets “pulled a gun out in entrance of me, pointed it at me, after which pointed it at himself,” saying “perhaps I ought to finish all of it.” Shortly after the incident, Joe and Shirly Roets fired the chief, they stated.
Proof of Monetary Misery
Since its inception, there was little proof that Dragonchain has generated significant income from firms utilizing its platform.
Although this isn’t uncommon for a high-risk startup, the corporate seemingly sabotaged offers with potential prospects. “Joe Roets went out of his approach to scare off Starbucks,” stated August Harper, previously Roets’ government assistant.
One other former government corroborated the 2 incidents, saying that “once we have been near signing new prospects, together with Starbucks, Joe would drive them away.” Brandon Kite added that, “Joe was extra thinking about sustaining the worth of his Dragon [tokens] than he was in working a enterprise.” With out dependable income, the corporate turned towards dependence on the cash it raised by means of its ICO.
Nevertheless, these funds are solely value a fraction of what they have been throughout 2017. Since then, the worth of the Dragon token has collapsed. Beforehand, one in all these tokens commanded as a lot as $5. By the tip of 2018 they traded under $0.10; now, they go for lower than $0.02.
There have been different indicators that the corporate was experiencing monetary issue as effectively. In Might of 2019, the corporate bought its penthouse at a $242,000 loss. Across the identical time, the corporate was delinquent on over $119,000 in taxes.
Lawrence Lerner, the corporate’s former President of Consulting Companies and a former bigwig at now defunct blockchain undertaking RChain, informed Crypto Briefing he left as a result of “they didn’t have any cash to pay me.” Different service suppliers additionally reported that they might not acquire funds from Dragonchain.
In the meantime, Joe and Shirly Roets have been accumulating salaries of $200,000 and $180,000, in keeping with one former government. Even with these excellent payments, Dragonchain made a $500,000 funding in Coinme, a Seattle-based Bitcoin ATM firm, at first of 2020.
On situation of anonymity, one of many firm’s former controllers informed Crypto Briefing that, whereas they have been organizing the corporate’s books, they discovered “issues lacking.” Some transactions performed in cryptocurrency “didn’t make its means again to the corporate,” they stated. They tried to trace down these transactions, and once they pressed the difficulty, the previous controller stated they have been fired.
The Aftermath of Mania
On August 16, 2022, years after first subpoenaing Dragonchain executives and workers, the SEC formally charged Joe Roets and Dragonchain for promoting unregistered securities. The company claims Dragonchain raised $14 million from about 5,000 buyers worldwide throughout its ICO, and cashed in one other $2.5 million within the interval from 2019 to 2022.
The SEC is looking for everlasting injunctions, disgorgement with prejudgement curiosity, civil penalties, and conduct-based injunctions in opposition to Roets and Dragonchain’s company entities.
Joe Roets said in an open letter that he was assured he had a “very sturdy case” in opposition to the fees. He moreover took the chance to extol the virtues of blockchain know-how, calling it “liberty encapsulated in software program,” and ended his letter with a quote from the revolutionary author Thomas Paine: “Tyranny, like hell, will not be simply conquered; but we now have this comfort with us, that the more durable the battle, the extra wonderful the triumph.”
Many of those points weren’t distinctive to Dragonchain. There have been a whole lot of startups from 2017 by means of 2018 that raised hundreds of thousands on the promise of blockchain know-how. A few of these firms disappeared completely. Others have been proven to be fraudulent. Some are nonetheless ready to see what occurs.
Dragonchain was one in all many firms swept up within the mania of 2017. It wasn’t the one undertaking that acted rashly—and even fraudulently—with the cash it raised from buyers. Like a lot of these startups seeking to faucet into the “transformative energy of blockchain,” they left former workers and buyers with little to point out for his or her work and the cash entrusted to them.
Issues occur shortly and impulsively within the cryptocurrency area, however accountability strikes slowly and intentionally. What looks as if historical historical past to crypto natives remains to be recent within the minds of regulators, authorities, and legislation enforcement, and the SEC’s actions in opposition to Dragonchain years after the very fact reveal that its reminiscence is lengthy and its persistence plentiful.
Disclosure: On the time of writing, the writer of this piece owned BTC, ETH, and different cryptocurrencies.