Jessica VerSteeg answered the phone and apologised for her voice. She was hoarse following a series of interviews to promote her startup, Paragon, which hopes to raise $60mn starting Friday to fund its plan to become the WeWork of pot.
The former model turned chief executive officer skipped the traditional fundraising route. Instead of an initial public offering of shares, VerSteeg is going with a very 2017 idea: an initial coin offering, selling digital tokens dubbed ParagonCoin that cannabis firms or nonprofits would use to pay rent at the company’s planned co-working spaces, to be located where marijuana is legal. A successful deal will add to more than $2bn raised by companies this year through ICOs, according to financial analysts at Autonomous Research.
Leading up to the sale, the 30-year-old blanketed social media, posing on Instagram with the rapper The Game. On Twitter, she suggested that the cash found in a pair of jeans could buy some of her digital currency. On the company’s Facebook page, VerSteeg posted updates on the presale of coins, which sold out - all in service to getting people to pay attention.
Also paying attention: regulators in Washington tasked with preventing investors from getting fleeced as ICO fever sweeps the country. The US Securities and Exchange Commission warned the industry in July that if these tokens are effectively securities such as stocks or bonds, they must be registered with the regulator.
The SEC is now monitoring the ParagonCoin deal and other pending ICOs to see whether they’re breaking that rule, according to a person familiar with the matter. Since many ICOs, including Paragon, are not registered with the regulator, the agency is keeping an eye on the market by following news reports on them, the person said. ParagonCoin hasn’t been accused of wrongdoing or triggered any SEC action.
“Our token’s not a security, it’s a utility,” she said in an interview. In addition to being used to pay, the coins will grant holders the right to vote on changes to how Paragon runs its business or to present ideas for how it could evolve, she said.
“The SEC is doing their job, they’re really trying to find the people breaking the rules,” VerSteeg said. “I’m actually thankful for them. I think to be scared of them means you’re doing something wrong.”
Any SEC enforcement action would hinge on the definition of a security. Under federal law, a security is typically created when investors provide money that funds a company with the intention of profiting from that company’s management. For example, when a jewelry store lends a customer money to buy a ring, that loan isn’t considered a security because the purpose is to increase sales. But if the company raises money through a stock sale to extend credit, that’s considered a security.
Paragon bills itself as “revolutionising all things cannabis with blockchain.” True to that mission, forget your US dollars or euros. To pay rent, hire in-house legal aid or buy a doughnut at the Paragon commissary, you must use the company’s digital coins. “If we could raise at least $60mn, it would be good enough to build one or two work spaces,” VerSteeg said, referring to its ParagonSpace co-working spaces. “We’re a tech company with a real estate side to it.”
Before creating ParagonCoin with her husband, Russian entrepreneur Egor Lavrov, she founded pot delivery service AuBox, which brought medical marijuana products to patients’ homes. She won the Miss Iowa US competition in 2014.
“It’s good to have these regulations because there’s so much going on,” said VerSteeg, who added the SEC hasn’t been in touch with her company. Scammers engaged in pump-and-dump schemes related to ICOs need to be stopped, she said. “Regulation will weed out some of that.”
ParagonCoin promoter The Game is far from the only celebrity to endorse an ICO Former championship boxer Floyd Mayweather promoted Stox, a digital coin linked to a prediction market. Paris Hilton, the celebrity famous for being famous, used her Twitter feed on September 3 to promote LydianCoin, a digital token that says it’s linked to the “first AI big data marketing cloud for blockchain.”
Almost from their inception, ICOs have been ripe for abuse. As much as 10% of the money investors have given this year to ICOs was instead stolen through phishing scams, in which thieves convince people to send money to Internet addresses that aren’t in fact linked to digital token offerings, according to a study by Chainalysis, a blockchain transaction verification company based in New York.
The SEC warned individual investors on August 28 of the risks in buying the tokens, cautioning that scammers are using the new fad to lure investors into old manipulation schemes such as penny-stock pump-and-dump scams. Other governments are paying attention too. China’s central bank said September 4 that ICOs are illegal.
For the moment, ICOs are largely a buyer-beware market, with many issuers cloaked in secrecy. ExioCoin, which had raised less than $500 as of September 12, claimed it had won the backing of a sovereign nation, which it didn’t name, and said it couldn’t disclose the identities of the development team “in order to preserve the integrity of the Foundation and the Exio principles.”
Some fraudsters are selling interests in the currencies through dormant companies. These corporate shells are often used in pump-and-dump schemes, the same fraud that made millions for Leonardo DiCaprio’s character in the film “Wolf of Wall Street.”
“It is relatively easy for anyone to use blockchain technology to create an ICO that looks impressive, even though it might actually be a scam,” the SEC said in its August statement.