SEC’s Phone Call to Protostarr Shuts Down its ICO

Protostarr, a block-chain based startup, has shut down its decentralized application and refunded its initial coin offering (ICO) participants following a request for information from the U.S. Securities and Exchange Commission (SEC). According to the company, on August 24, the SEC contacted Protostarr and asked the company to “volunteer a bunch of information” in relation to their recent ICO that raised $47,000 last month. In response to the SEC’s contact, Protostarrr announced that “[a]fter consultation with multiple lawyers, we have decided to cease further operations and refund Ethereum collected in our crowdsale.”  This appears to be the first known “action” by the SEC following the release of its investigational report into The DAO, issued on July 25, 2017, along with the SEC’s guidance on token sales.  In the report, the SEC concluded that the DAO’s tokens were of a character as to fall under the definition of a security under current law.  The SEC’s action against Protostarr seems consistent with its July 25, 2017, guidance.

Protostarr  described itself in its white paper as “a new evolution for the world of digital media investing; changing the model from donation to investment.  Using Protostarr smart contracts to invest in an up-and-coming content creator will 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. This decentralized crowd investment and earnings distribution DApp (Decentralized Application) connects investors with rising internet celebrities, such as Youtubers, Twitch casters, and other video and live streaming platforms that share advertising and subscription revenue with content creators.”

Protostarr’s Chief Executive Joshua Gilson admitted that Protostarr did not contact any legal counsel prior to releasing its white paper or launching its token. “We’re just a couple guys who are tech nerds in our basement,” said Gilson. ”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.”. While it is not known whether the SEC will ultimately initiate an enforcement action against the company or Mr. Gilson, the reference being able to invest in others and profit therefrom likely attracted the SEC’s attention as potentially a “securities” like token.  This development, as well as the statement on September 4, 2017, by the Chinese authorities banning ICOs in China, is a reminder that there remains a lot of uncertainty in the area of ICOs.  It also demonstrates that no ICO is too small to avoid scrutiny.