SEC Settles First Self-Reported Unregistered ICO (Gladius) | Practical Law

SEC Settles First Self-Reported Unregistered ICO (Gladius) | Practical Law

The Securities and Exchange Commission (SEC) accepted a settlement offer (without a penalty) from a blockchain company that self-reported an unregistered initial coin offering (ICO) to the SEC.

SEC Settles First Self-Reported Unregistered ICO (Gladius)

Practical Law Legal Update w-019-1901 (Approx. 4 pages)

SEC Settles First Self-Reported Unregistered ICO (Gladius)

by Practical Law Corporate & Securities
Published on 25 Feb 2019 • USA (National/Federal)
The Securities and Exchange Commission (SEC) accepted a settlement offer (without a penalty) from a blockchain company that self-reported an unregistered initial coin offering (ICO) to the SEC.
On February 20, 2019, the Securities and Exchange Commission (SEC) accepted a settlement offer from a blockchain company that self-reported an unregistered initial coin offering (ICO) to the SEC.
According to the SEC Order:
  • In late 2017, Gladius Network LLC publicly offered and sold digital coins, called GLA Tokens, in exchange for Ether, a digital asset on the Ethereum blockchain.
  • Gladius raised approximately $12.7 million in capital through the ICO to facilitate the further development of a blockchain-enabled cybersecurity network.
  • Gladius did not register the ICO pursuant to the federal securities laws, and the ICO did not qualify for an exemption to the registration requirements.
The SEC had previously warned in its DAO Report that ICOs may be securities offerings subject to federal securities laws. In this instance, the SEC found that GLA Tokens were indeed securities under the Howey test (see Practice Note, Security Defined). The SEC found that:
  • A purchaser in the offering would have had a reasonable expectation of obtaining a future profit based upon Gladius's efforts:
    • to create a "marketplace" using the proceeds from the sale of GLA Tokens; and
    • to provide investors with liquidity by making GLA Tokens tradeable on secondary markets.
  • Gladius violated Sections 5(a) and 5(c) of the Securities Act by offering and selling these securities without:
    • having a registration statement in effect with the SEC; or
    • qualifying for exemption from registration.
The SEC did not impose a penalty because of the significant steps Gladius took to remediate the violation, which included:
  • Self-reporting the ICO to staff in the SEC's Division of Enforcement in the summer of 2018.
  • Cooperating with the staff's investigation.
  • Agreeing to register the GLA Tokens as a class of securities under the Exchange Act.
  • Undertaking a rescission offering to give its ICO purchasers the opportunity to recover the purchase price paid for GLA tokens plus interest, less any income received, on returning the securities to Gladius.
For more information on recent cryptocurrency developments, see Legal Updates: