Last week, Prostarr’s ICO was shut down after they received a call from the SEC. The Virginia-based technology startup and Ethereum-based decentralized application was to allow Youtubers and Twitch Casters to receive funding from fans and investors. The following press release was posted to the Protostarr website and is reproduced below:
“On August 24, 2017, we were contacted by the United States Security and Exchange Commission regarding the initial coin offering of Protostarr tokens to fund the development of our Ethereum decentralized application. After consultation with multiple lawyers, we have decided to cease further operations and refund Ethereum collected in our crowdsale that began on August 13, 2017.
Like many of our supporters, we were excited to be an innovative force in the emerging space of content creation and its funding. Unfortunately, as a startup, we do not have the necessary resources to both develop our DApp and challenge the SEC’s investigation regarding our ICO and its interpretation under US securities law.
Individuals who paid Ethereum to the crowdsale payment address will receive a refund to the originating wallet address. These originating wallet addresses are verifiable on the Ethereum blockchain that’s attached to the ICO contract at here: https://etherscan.io/address/0xEa16ebd8Cdf5A51fa0a80bFA5665146b2AB82210#internaltx
Refunds will begin on September 02, 2017 for all incoming transactions made to the crowdsale wallet before the refund date.
For immediate inquiries related to the refund of payments, contact email@example.com.”
No legal advice sought pre-ICO
The CEO of Protostarr, Joshua Gilson, stated that they were contacted by the SEC on August 24, 2017 to provide more information about the ICO and the project itself. Based on this call, Joshua reached out to lawyers to seek guidance about the information requested. Counsel advised that it would be better to close down the project and return any funds collected via the ICO sale process. Protostarr plans to refund all participants by September 2, 2017.
In a message posted on Bitcointalk forums, Joshua Gilson wrote:
“Thanks for understanding. We are just working on making sure all refunds are handled properly so no one loses any money. At least ETH is worth more now than it was during the campaign so everyone is getting more value back than they donated. It is unfortunate though. We feel we had a novel idea that can help a lot of people, but because ICO’s are now on the SEC’s radar we would have to get a legal department hired on earlier than the plan, which we can’t afford to do while giving value to those who supported us. We are losing all the money we put into this, but want to make sure our supporters are taken care of. We will live and learn and start pushing forward as a team.”
SEC and token regulations
ICO funding has now overtaken traditional VC funding with almost $1.2b worth of money flowing in 2017 alone, causing these projects to be keenly watched by regulators. The SEC recently came out with a report on the DAO token sale which stated that some of the existing ICOs may be classified as securities per the Howey test. The SEC also issued an investor alert warning people to carefully evaluate ICO offerings to identify potential fraud and ensure that they don't fall prey to a scam. This is especially important, since there is very limited recourse available to recover the funds.
More ICOs may get the “call”
Protostarr meanwhile has confirmed via Twitter that it has returned all funds received as part of the ICO process. However they aren’t the first ICO-funded company to take heat from the SEC. Andrew Chapin from BenjaCoin, which ran an ICO selling tokens for its ad network, wrote a detailed Medium post about the unexpected call he received from Mark Vilardo at the SEC.
However, Chapin says he is confident that BenjaCoin wouldn’t constitute a security under SEC rules, despite it being traded on exchanges just like any other ERC-20 token.