Hollywood-based ParagonCoin Inc. – a cryptocurrency company targeted at the cannabis industry – may be in dire straits after settling a lawsuit brought by the U.S. Securities and Exchange Commission.

As part of the settlement, the company must pay a $250,000 fine and file a Form 10 − a securities registration form − with the SEC within 90 days. On Dec. 14, the company also opened a claims process whereby investors who bought digital tokens could recoup money.

The lawsuit stems from the company’s October 2017 initial coin offering – a process during which it sold a proprietary cryptocurrency to investors. The offering generated more than $12 million for the company, but those funds can be reclaimed by investors who bought in. The SEC settled the case with Paragon Nov. 16 but did not announce the decision until Dec. 14.

The crux of the SEC’s claim is that Paragon misrepresented its token sale to potential investors in the lead-up to the initial coin offering.

“One of the many reasons the SEC (filed the lawsuit against Paragon) was the prevalence of fraud and mismanagement, as reported in the case filings,” said Jennifer Post, partner at Century City-based securities law firm Thompson Coburn. “Any buyer of a valuable asset needs to know the seller is equipped to sell.”

Paragon Chief Executive Jessica VerSteeg declined to comment on the settlement.

The SEC’s investigation could force the company to go public, according to Post, because it accepted more than 5,000 investors as part of its initial coin offering. Proceeds from the offering were used as a security to extend credit for a cannabis co-working space on Hollywood’s Tamarind Avenue, which opened in August 2018.

As part of the company’s marketing efforts in the lead-up to the initial coin offering, or ICO, Paragon employed rapper The Game, birth name Jayceon Terrell Taylor, to drum up support and encourage investments in the company.

“This case has a trifecta − it’s got celebrity, cryptocurrency and cannabis. If you throw those things together, and it’s not properly counseled, it can blow up really quickly,” Post said.

A securities class action was also filed in June by Paragon token holders in Northern California federal court in a separate action from the SEC suit.

“Investors grouped together to sue,” Post said. “That’s a change in the ICO market, and it’s interesting to see the facts here were bad enough to warrant a class action.”

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