Regulatory uncertainty appears to be arriving late to Washington state.

In what seems like the latest sign concerns are impacting initial coin offerings (ICOs) broadly, Seattle-based Dragonchain is forcing one of its affiliate projects, Norwegian startup Iagon, to return funds it raised from investors back in April – and it’s currently unclear why.

In fact, on April 28, the day its presale was scheduled to end, Iagon published a Medium post explaining to investors that the sale had been paused. Notably, it wasn’t Iagon’s idea; the company had recently joined an incubator backed by Dragonchain, and it was Dragonchain, an enterprise blockchain startup spun out of Disney, that brought the hammer down.

But even Iagon CEO Navjit Dhaliwal said he can’t quite account for the turn of events as the ICO, which had raised approximately $1.3 million in ethereum at that time, was cancelled.

Although, he believes it has something to do with regulation, especially a possible stance from the SEC, Dhaliwal wasn’t exactly forthcoming with a clear answer.

Dhaliwal told CoinDesk:

“It is my understanding that Dragonchain is continuing to tread cautiously as the SEC has been investigating all ICO and blockchain projects that arise.”

He continued, saying that Iagon met with Dragonchain on April 30 to get more details, but “answers remained indirect.” Adding a bit more to the mystery, according to an admin on a public Dragonchain Telegram channel, the Iagon sale was cancelled “per legal guidance.”

The admin went on, telling members to expect a statement from the Dragonchain CEO about its course of action going forward.

Still, there could be a broader problem at play. The Iagon token sale was part of a program Dragonchain created after raising $13.7 million in its own ICO in November. Five token issuers, including Iagon, have been incubated by the company so far, and pre-sales haven’t gone well.

Based on posts in another Telegram channel, investors in the Look Lateral token presale, which ran on Dragonchain late last year, have been asking for refunds, primarily because the team has not launched its scheduled sale.

Another issuer using the platform, LifeID, cancelled its presale based on “legal advice.”

All these instances seem to point to the regulatory uncertainty around crypto tokens as having a significant impact on the industry that’s been built around this new way to raise capital.

And as such, the future of Dragonchain’s incubator in likewise uncertain. Several Telegram channel posts indicate that the incubator has been suspended, but no official announcement has been made.

Dragonchain has not responded to repeated requests for comment.

Rough seas

All told, Iagon, which planned to run a public sale with a cap of $77 million starting on May 10, is now scrambling to revise the timeline and find a new partner platform to execute another presale as well as a later public sale.

But in the current environment that could be challenging.

For some, the question could be: why did it take so long for Dragonchain to act on rumors the SEC and other regulators were investigating the space?

Indeed, many began predicting that the SEC would make a move at the beginning of the year, and in March, it was reported that an SEC crackdown was on its way. SEC subpoenas started arriving, government officials began hinting that guidance was imminent and a handful of token entrepreneurs mulling over ICOs and airdrops began pulling back.

But Dragonchain continued on with the Iagon partnership, whereby the Iagon token would be limited to holders of Dragonchain’s “dragon” tokens.

According to Dhaliwal, Iagon had wanted to collaborate with Dragonchain since the company has a much higher-profile and deeper community than the Norwegian startup.

But, Dhaliwal continued, “It seems as though Dragonchain has made several changes to their legal team (this is an assumption, due to the answers that were given). It seems as though the new Dragonchain legal counsel members have different views regarding the incubator program or the intricacies of the presale.”

Not much is known about the specific reasons why Dragonchain’s new legal counsel is uneasy with the sale, and Dhaliwal would not confirm whether or not unaccredited investors in the U.S. were excluded.

Only allowing accredited investors to buy into a token sale has become standard practice for ICO issuers selling into the U.S. market, primarily because they’re typically using a Regulation D exemption, under the Securities Act, to not be classified as a security.

Speaking to the requirements of Reg D, Joshua Ashley Klayman, co-chair of Morrison & Foerster’s Blockchain + Smart Contracts Group, said, “One of those requirements is that the token seller takes reasonable steps to verify the accredited investor status of purchasers that are US persons.”

Klayman, who is also the chair of the Wall Street Blockchain Alliance Legal Working Group, continued, “In my experience, many token sellers report engaging certain ‘permitted third-party verifiers’ to confirm that such purchasers are, in fact, accredited investors.”

New rules needed?

As the regulatory air starts to clear, though, some believe this situation will become all the more common.

For instance, TokenSoft founder Mason Borda tweeted that the Iagon refund will likely be part of a forthcoming trend whereby ICO issuers that missed a part of the compliance flow would be “cleaning up.”

While there seems to be an increasing interest in designing crypto tokens and the sales to fit under existing regulatory rules, others are pushing for a completely different set of rules to be crafted for the industry.

Dragonchain seems to be interested in the later, writing in a community update, “It should be noted that until a regulatory framework for utility tokens is defined, ‘compliance’ seems to be a moving target to which we will always strive to fulfil our due diligence to not only position ourselves as the business blockchain solution but more importantly, to protect all dragon holders — always.”

The update continued, encouraging community members to pressure lawmakers – specifically asking them to reach out to members of the U.S. House Financial Services Committee and the Senate Banking Committee “to seek regulation standards and voice your opinion to educate legislators and regulators on the value that blockchain offers.”

One supporter of that notion has even made a Change.org petition on the same topic.

While some major institutional investors have already begun lobbying efforts for the crypto token space, these grassroots efforts are likely to continue since so many retail investors are also involved.

Speaking to what it sees as the importance of these grassroots efforts and seeming to hint at the fact that many think U.S. regulations could send entrepreneurs packing for friendlier jurisdictions, Dragonchain said:

“Dragonchain is a proud U.S.-based blockchain company and in the spirit of the American Dream, we seek to provide blockchain capabilities to all humans.”

Dragon bridge in Vietnam photo via Shutterstock.