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From Securities Regulation Daily, February 20, 2019

Self-reporting ICO dodges penalty for failure to register

By Anne Sherry, J.D.

Although Gladius Network failed to register its post-DAO initial coin offering, the SEC declined to impose a penalty based on its self-reporting and prompt remediation.

The SEC charged a D.C.-based cybersecurity company with failing to register an initial coin offering, but did not require the company to pay a penalty. About a year after its 2017 ICO, Gladius Network LLC reported the violation to the Division of Enforcement and expressed an interest in taking prompt remedial steps. The resulting settlement requires Gladius to return funds to investors upon request, to register its tokens as securities, and to file periodic reports (In the Matter of Gladius Network LLCRelease No. 33-10608, February 20, 2019).

Gladius created tokens to serve as currency for the provision of cybersecurity services on its network. In the last quarter of 2017, Gladius publicly offered and sold the tokens, raising about $12.7 million worth of the digital currency ether. The offering also included a bounty component through which participants could earn tokens and bitcoin in exchange for their promotion efforts.

After evaluating the applicability of the federal securities laws to the ICO, in the summer of 2018 Gladius self-reported the violations to the SEC and informed Commission staff of its interest in prompt remediation. Gladius’s cooperation in the SEC’s investigation included providing information quickly and in a useful format.

To settle the matter, Gladius agreed to issue a press release within two weeks to notify the public of the SEC’s order. The company has 90 days to register its tokens as a class of securities, and 60 days after that to notify token purchasers of their potential claims. It also has to report to the SEC on its handling of the claims it receives.

The SEC notes in its press release that Gladius conducted its offering after the SEC issued its first major guidance on initial coin offerings. In the so-called DAO Report, released in July 2017, the agency clarified that tokens can be securities based on the Howey test. The Gladius order finds that the tokens were securities under this test, as a purchaser in the offering would have had a reasonable expectation of obtaining future profits based on Gladius’s efforts.

This settlement is another signal of the SEC’s willingness to work with companies that want to get on a compliance track following an unregistered ICO. In a November 2018 statement accompanying the SEC’s first orderspenalizing companies solely for failure to register (that is, without any finding of fraud), several agency divisions issued a joint statement demonstrating such a path to compliance. Gladius had already self-reported its failure to register the SEC at the time of the orders and statement.

The Release is No. 33-10608.

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