On February 20, 2019 the U.S. Securities and Exchange Commission (“SEC”) reached a settlement with Gladius Network LLC for conducting an unregistered initial coin offering (“ICO”), which the company self-reported to the SEC.
In July 2017, Gladius’s founders began developing a network in which participants could rent spare bandwidth and storage space on their computers and servers to others for use in defense against certain types of cyberattacks and to enhance their content delivery speed. As part of this process, Gladius created digital coins (“GLA Tokens”) to be issued on a blockchain. GLA Tokens would serve as the sole “currency” for the provision of services within the Gladius network, record those transactions, and enable the delivery of content to servers and websites renting out their bandwidth to Gladius customers.
From October 2017 through December 2017, Gladius conducted an ICO in which it publicly offered and sold GLA Tokens in exchange for Ether in order to raise capital to facilitate the further development of the Gladius network. Gladius raised approximately $12.7 million during its ICO. But the company did not register the offering pursuant to the federal securities laws, nor did it qualify for an exemption to the registration requirements.
The SEC Order and press release made two important points that have become commonplace in SEC discussions of ICOs. First, the issue of whether GLA Tokens qualified as a security is determined under the Howey test (see here). Second, the ICO was conducted after the SEC had issued its DAO report, which warned that ICOs can qualify as securities offerings. According to the SEC’s Order, the ICO violated federal securities laws regarding the registration of securities offerings.
Under the settlement, Gladius agreed to (i) return funds to those investors who purchased tokens in the ICO and requested a return of funds, (ii) register its tokens as securities pursuant to the Securities Exchange Act of 1934, and (iii) file required periodic reports with the Commission.
The case is notable because Gladius self-reported to the SEC in 2018. The SEC press release accompanying the settlement noted this and the fact that Gladius expressed an interest in taking prompt remedial steps, cooperated with the investigation and agreed to compensate investors. This should be contrasted to with two other recent cases of ICO registration violations that did not involve self-reporting and in which penalties were imposed. The SEC is clearly sending a message that there are benefits to self-reporting in the obvious hope that others will follow suit.