• A cryptocurrency project looking to transform the pot industry with blockchain is facing a lawsuit, according to a Bloomberg Law report.
  • The suit claims that the offering was not registered with authorities and that investors want their money back.
  • Paragon first drew attention to its initial coin offering when it got the celebrity endorsement of rapper the Game.

A cryptocurrency company looking to use blockchain technology to transform the pot industry has been hit with a lawsuit, according to a Bloomberg Law report.

Paragon, the blockchain company founded by former Miss Iowa Jessica Versteeg, did not register its initial coin offering with the regulators, according to a suit filed with a district court in California.

The startup raised more than $70 million in its ICO, a cryptocurrency fundraising method, “which investors now want back, according to the complaint,” Bloomberg Law reported.

"This suit is one of several brought by unhappy investors against ICOs in the last few months, although no federal court has yet held that ICOs are subject to securities laws," the report adds.

A media contact who represented Versteeg in August did not immediately respond to Business Insider's request for comment.

When Business Insider first reported on Paragon in August prior to its ICO, Versteeg said the firm would address "real problems in the cannabis industry."

"This isn't another Potcoin," she said referring to another weed-focused cryptocurrency. "People will be pleasantly surprised with what we are doing."

Celebrities such as rapper The Game drew attention to the ICO when they endorsed it over social media.

Regulators have been paying closer attention to the ICO market, which is known for its fair share of big dreams and fraud.

In December, SEC Chairman Jay Clayton had harsh words for ICOs after the agency shut down an offering. Clayton said in a blog post that despite claims of not being subject to regulation, many of the digital coins were in fact securities and thus subject to the agency's authority.

"I believe that initial coin offerings - whether they represent offerings of securities or not - can be effective ways for entrepreneurs and others to raise funding, including for innovative projects," he said.

"However, any such activity that involves an offering of securities must be accompanied by the important disclosures, processes and other investor protections that our securities laws require."

The regulator's concern is that ICOs provide a way for companies to solicit money from small-time investors without properly disclosing risk.

Graham Rapier contributed reporting.