Once one of crypto’s most hyped projects, ICO-era startup Dragonchain and its founder were charged today by the SEC for the sale of $16.5 million in unregistered securities.
The charges follow years of alleged mismanagement and reportedly tyrannical leadership under CEO Joe Roets, whom employees claim managed the company with “fear and intimidation.”
Dragonchain’s lavish spending and poor financial management quickly resulted in the project’s deterioration and drew the attention of regulators in the U.S.
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Dragonchain once had big ambitions to bring the “magic of blockchain technology” to businesses around the country. Today, the Securities and Exchange Commission is charging the project and its founder, Joe Roets, with having sold $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 originally developed in 2015 from one of the Walt Disney Company’s incubators as the Disney Private Blockchain Platform. That is until the architect behind the project, John Joseph Roets (who goes by “Joe” Roets), went rogue, according to his early collaborators.
Roets spun the project out as a non-profit, wresting control of the intellectual property and brand from Disney and cutting ties with his former collaborators entirely. In August of 2017, Dragonchain Inc. was announced, a for-profit startup keen on cashing in on the cryptocurrency mania.
The startup aimed to build a “turnkey blockchain platform for business.” Like many competitors, it promised “security and flexibility unseen in the market,” positioning Dragonchain for “exponential growth.”
Dragonchain announced it would raise money by selling its own cryptocurrency, called “Dragon tokens.” Furthermore, beyond building its own technology to compete with other enterprise blockchains, like Hyperledger and R3, Dragonchain sought to form an incubator to help other startups raise their own rounds on the Dragonchain platform.
Shortly after announcing the launch of its for-profit corporation, Dragonchain held two initial coin offerings, or ICOs. Enthusiasm around the sale was tremendous, with investors from Asia to Europe excited by Disney’s potential involvement, despite the project no longer having any affiliation with the media giant.
Taking advantage of the name association, Dragonchain was able to raise over $15 million in Bitcoin and Ethereum over the course of four months. At the insistence of Roets, participation in the sale was available to anyone in the world without restrictions.
As a result of surging cryptocurrency prices, the startup’s hoard was worth over $50 million by December. At its peak in January 2018, Dragon tokens were worth over $5 each, giving the company a valuation of over $1.2 billion.
Spending the Treasure Hoard
On the back of the successful fundraising, Dragonchain was able to more than just grow its team and open a new office. It generously sponsored many of the newly sprouted blockchain conferences and events in Washington state, as well as funding one of its own—Blockchain Seattle. The startup even helped fund the formation of the Washington Technology Industry Association’s Cascadia Blockchain Council (WTIA), where Joe Roets sits as a steering committee member.
Corey LaJoie’s No. 72 Sponsored by Dragonchain
Other expenditures were a little more lavish. Dragonchain’s non-profit purchased a penthouse worth $2.2 million atop the Bellevue Pacific Tower to entertain clients and investors. In July 2018, it sponsored NASCAR Cup Series driver Corey LaJoie in Daytona. In 2019, the startup commissioned a media company to produce a documentary series about Dragonchain.
Despite the impressive spending, however, it wasn’t long after Dragonchain’s token sale before trouble began.
The Problem with ICOs
After its successful raises, Dragonchain wanted to help other blockchain projects raise their own multi-million dollar rounds. Within months, it signed on tens of startups looking to raise money.
At least one company was able to raise money on top of the Dragonchain platform. Look Lateral, a company trying to sell shares of art through cryptocurrency, held a token sale facilitated by Dragonchain in 2018.
However, around this time, regulators began scrutinizing the untamed ICO scene. Many of these token sales were unregistered securities offerings, according to guidelines from regulators.
These rules, enforced by the Securities and Exchange Commission (SEC), ensure that investors receive consistent and accurate financial information about the companies they invest in. The regulator is particularly vigilant about securities investments offered to the general public.
Around 2017, the SEC started ramping up its cryptocurrency offerings enforcement. In December 2017, the Commission issued its first cease-and-desist proceedings against a company selling tokens issued on a blockchain.
Through 2018, the regulator continued to tighten enforcement. That year, it halted multiple fraudulent offerings, shut down an unregistered cryptocurrency exchange, and even charged boxer Floyd Mayweather Jr. and music producer DJ Khaled for unlawfully promoting ICOs.
Nevertheless, Joe Roets was voracious when it came to fundraising, pushing companies to raise money through Dragonchain while the market was still hot, said Brandon Kite, the former software development lead at Dragonchain. “But there’s no way anybody could use Dragonchain for that stuff legally, that’s why they don’t have any customers,” Kite said. Two former executives at the company have gone as far as to say that Roets and two other employees were directly subpoenaed by the SEC in 2019. Crypto Briefing confirmed this date after one source shared the subpoena they received from the SEC.
The scrutiny had an impact on business. For example, blockchain identity startup LifeID was one of the startups that considered joining Dragonchain’s incubator. The founder of the company, Chris Boscolo, told Crypto Briefing that his company had been in negotiations to conduct an ICO through Dragonchain in late 2017. But, based on guidance from his legal counsel, he was told to limit the offering to accredited investors in order to remain in compliance with securities laws.
That is when the deal broke down with Dragonchain. According to Boscolo, the company informed him that they were only interested in supporting his token sale if there were no restrictions on who could participate—just like Dragonchain’s own ICO.
The insistence would prove to be a dealbreaker. “LifeID has decided to follow the guidance of their legal team and due diligence for their ICO. Upcoming presale has been canceled,” said Dragonchain on social media.
Ruling Through Fear
Crypto Briefing interviewed more than 10 employees at the company and reached out to more than 30 people connected to the company in total. Many declined to comment, wanting to avoid litigation or harassment. Those that did speak said that the Roets’ managed the company through “ fear and intimidation,” with some describing the experience as “traumatic.”
In conversations with former employees, many cited the same reason for leaving—their poor treatment by Joe Roets and his wife, Shirly Roets, who was second in command.
Chin-One Chan, Dragonchain’s Marketing Manager for Asia during 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 agreement after she raised concerns about promises made to her prior to the ICO. When she refused, Dragonchain fired her and withheld her wages along with Dragon tokens she was supposed to receive for the work she conducted, according to Chan.
Another employee alleged that after they were fired, the company tampered with their W-2 filings with the IRS and three colleagues in an alleged attempt to increase their tax bill as punishment.
Several employees also said they had Dragon tokens promised to them for their work that was “clawed back.” A total of 20% of Dragon tokens issued were allocated to founders and early employees, similar to stock options. One of these employees showed Crypto Briefing an employment agreement detailing their allocation of tokens.
Employees said they were asked to return these tokens for tax purposes and that they’d be returned at a later date. They claim to have never received them, and when they pressed Dragonchain about the tokens, the company used it as negotiating leverage or simply didn’t distribute them at all. Transactions on the blockchain line up with stories from these employees.
Not only would the company attempt to intimidate people financially, but Dragonchain would also do so legally. “Joe Roets is litigious, to say the least,” said one former employee. More than two employees involved with the company said that Joe Roets initiated “frivolous lawsuits” against them after they left.
One striking example of the conditions at Dragonchain is from a former executive, who spoke with Crypto Briefing on condition of anonymity. They said that after raising concerns about “inconsistencies” in Dragonchain’s finances, Joe Roets “pulled a gun out in front of me, pointed it at me, and then pointed it at himself,” saying “maybe I ought to end it all.” Shortly after the incident, Joe and Shirly Roets fired the executive, they said.
Evidence of Financial Distress
Since its inception, there has been little evidence that Dragonchain has generated meaningful revenue from companies using its platform.
Though this isn’t unusual for a high-risk startup, the company seemingly sabotaged deals with prospective customers. “Joe Roets went out of his way to scare off Starbucks,” said August Harper, formerly Roets’ executive assistant.
Another former executive corroborated the two incidents, saying that “when we were close to signing new customers, including Starbucks, Joe would drive them away.” Brandon Kite added that, “Joe was more interested in maintaining the value of his Dragon [tokens] than he was in running a business.” Without reliable revenue, the company turned toward dependence on the money it raised through its ICO.
However, these funds are only worth a fraction of what they were during 2017. Since then, the value of the Dragon token has collapsed. Previously, one of these tokens commanded as much as $5. By the end of 2018 they traded below $0.10; now, they go for less than $0.02.
There were other signs that the company was experiencing financial difficulty as well. In May of 2019, the company sold its penthouse at a $242,000 loss. Around the same time, the company was delinquent on over $119,000 in taxes.
Lawrence Lerner, the company’s former President of Consulting Services and a former bigwig at now defunct blockchain project RChain, told Crypto Briefing he left because “they didn’t have any money to pay me.” Other service providers also reported that they could not collect payments from Dragonchain.
Meanwhile, Joe and Shirly Roets were collecting salaries of $200,000 and $180,000, according to one former executive. Even with these outstanding bills, Dragonchain made a $500,000 investment in Coinme, a Seattle-based Bitcoin ATM company, at the beginning of 2020.
On condition of anonymity, one of the company’s former controllers told Crypto Briefing that, while they were organizing the company’s books, they found “things missing.” Some transactions conducted in cryptocurrency “didn’t make its way back to the company,” they said. They attempted to track down these transactions, and when they pressed the issue, the former controller said they were fired.
The Aftermath of Mania
On August 16, 2022, years after first subpoenaing Dragonchain executives and employees, the SEC formally charged Joe Roets and Dragonchain for selling unregistered securities. The agency claims Dragonchain raised $14 million from about 5,000 investors worldwide during its ICO, and cashed in another $2.5 million in the period from 2019 to 2022.
The SEC is seeking permanent injunctions, disgorgement with prejudgement interest, civil penalties, and conduct-based injunctions against Roets and Dragonchain’s corporate entities.
Joe Roets stated in an open letter that he was confident he had a “very strong case” against the charges. He furthermore took the opportunity to extol the virtues of blockchain technology, calling it “liberty encapsulated in software,” and ended his letter with a quote from the revolutionary writer Thomas Paine: “Tyranny, like hell, is not easily conquered; yet we have this consolation with us, that the harder the conflict, the more glorious the triumph.”
Many of these issues weren’t unique to Dragonchain. There were hundreds of startups from 2017 through 2018 that raised millions on the promise of blockchain technology. Some of these companies disappeared entirely. Others were shown to be fraudulent. Some are still waiting to see what happens.
Dragonchain was one of many companies swept up in the mania of 2017. It wasn’t the only project that acted rashly—or even fraudulently—with the money it raised from investors. Like many of those startups looking to tap into the “transformative power of blockchain,” they left former employees and investors with little to show for their work and the money entrusted to them.
Things happen quickly and impulsively in the cryptocurrency space, but accountability moves slowly and deliberately. What seems like ancient history to crypto natives is still fresh in the minds of regulators, authorities, and law enforcement, and the SEC’s actions against Dragonchain years after the fact demonstrate that its memory is long and its patience abundant.
Disclosure: At the time of writing, the author of this piece owned BTC, ETH, and other cryptocurrencies.
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