A startup that didn’t invest in a pre-ICO legal consultation decided to shut down after the U.S. Securities and Exchange Commission (SEC) called with some questions. The incident serves as a reminder that startups should consult a blockchain lawyer before an ICO.

Protostarr’s Busted Initial Coin Offering

A dApp (decentralized application), Protostarr’s creators envisioned a fan-funding platform for artists, online celebrities, and aspiring professional gamers. According to the startup, the plan was to “give a new generation of unsponsored artists the ability to fund their operations while providing fans the content they are looking for and the opportunity to profit based on their success.”

Protostarr Launches an ICO; SEC Takes Notice

On August 13th, Protostarr launched an initial coin offering and raised 120 ETH (about US $47,000, at the time). On August 24^th, the Securities and Exchange Commission contacted Protostarr.

Joshua Gilson, Protostarr’s chief executive, explained:

“[The SEC investigators] called and asked for me to volunteer a bunch of information about the company. They gave me a quick little brief: They’re both federal investigators, anything I say has to be truthful or honest, I could be prosecuted for providing false information — a bunch of stuff like that, so immediately, I said, I would like to be open with you guys but this is sounding like an ‘I should get a lawyer’ kind of conversation.”

Protostarr Abandoned ICO and Refunded Investors After SEC Inquiry. Why?

After consulting “multiple lawyers,” Protostarr pulled the plug on its ICO and remitted full refunds, explaining to investors that it did “not have the necessary resources” to deal with an SEC investigation.

Was there a silver lining to the Protostarr ICO? Gilson wrote:

“At least ETH is worth more now than it was during the campaign so everyone is getting more value back than they donated. […] We are losing all the money we put into this, but want to make sure our supporters are taken care of.”

Before You Launch an ICO, Consult With A Blockchain Lawyer

When asked about the situation, Gilson lamented:

“We’re just a couple guys who are tech nerds in our basement. It didn’t occur to us that the model everyone else in the world is using would have any specific laws here that would apply to us. We just weren’t aware. In the month leading up to it, we were going full bore, working till 2am every night on the ICO, so we didn’t even see the DAO ruling when it came out until someone brought it to our attention.”

Protostarr’s story is like so many others. In startup development stage, the focus is pathologically on the project — and sometimes, legal considerations get tossed aside and forgotten about. Protostarr’s story should serve as a cautionary one — a reminder that finding a blockchain lawyer, who can advise on compliance issues, should be a top priority — even before launch.

Connect With A Blockchain Lawyer

Are you in the pre-launch stage of a startup? Want to make sure your legal ducks are in a row before your ICO? If so, we can take that off your plate and handle it. Get in touch today to begin the conversation.

Article Sources

Shin, L. (2017, September 1). After Contact By SEC, Protostarr Token Shuts Down Post-ICO, Will Refund Investors. Retrieved October 11, 2017, from https://www.forbes.com/forbes/welcome/?toURL=https%3A%2F%2Fwww.forbes.com%2Fsites%2Flaurashin%2F2017%2F09%2F01%2Fafter-contact-by-sec-protostarr-token-shuts-down-post-ico-will-refund-investors%2F&refURL=&referrer=#4d94a151192e