Protostarr is an aspiring entertainment industry company that was running an ICO. The ICO has been shut down after a call from the SEC:

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.

Protostarr was building a “Digital Media Investing DApp,” in which you would fund a video maker’s YouTube or Twitch channel and get a percentage of their advertising income. (White paper, archive.) They appear to have been sincere, well-intentioned and upfront about who they were and what they were doing.

Two SEC investigators phoned Joshua Gilson at Protostarr on 24 August, seeking to ascertain if their ICO constituted selling a security.

Protostarr hadn’t thought to seek legal advice before starting the ICO. (“We’re just a couple guys who are tech nerds in our basement,” says Gilson.) They’d thought their tokens wouldn’t count as securities because they didn’t confer ownership in Protostarr itself — but the SEC notes that a hallmark of a security is “a reasonable expectation of profits based on the efforts of others,” and Protostarr’s white paper explicitly states “The Protostarr investor token allows investors the opportunity to share the combined income.” And Protostarr is a US-based company, and calling them “investor tokens” may have caught the SEC’s eye.

Gilson called various securities lawyers, none of whom were sure either. The SEC Office of Small Business Policy advised that the conservative course of action would be to refund everyone. Protostarr will be returning the 119.5 ETH (about $47,000) to the 118 buyers starting tomorrow, 2 September; the SEC isn’t expected to penalise them.

Protostarr has been today’s big news, but they aren’t the only ICO that’s had a call — Andrew Chapin from BenjaCoin, which ran an ICO selling tokens for its ad network, had a nice conversation in late July with Mark Vilardo from the SEC. Chapin is confident that BenjaCoin wouldn’t constitute a security under SEC rules, though it’s being traded on exchanges just like any other ERC-20 token that crypto investors buy low in order to sell higher.

The SEC seems to be taking a soft touch approach with ICO promoters, but I’d expect they’ve called and had a quiet word with others too. (Compare the $20,000 fine for Elaine Ou’s Sand Hill Exchange a couple of years ago, which provoked an official investor warning.) Remember that regulators are not in fact there to harsh your mellow — the third point of the SEC’s mission statement is “facilitate capital formation.” But of course, point two is “maintain fair, orderly, and efficient markets,” and point one is “protect investors.” Assume the SEC’s Distributed Ledger Technology Working Group is actively monitoring the space.