As I have already mentioned, I would selectively comment of news that I believe indicate significant events, policy changes, technological breakthroughs, and disruptive business models.
Thus, I decided to comment on a news feed that first appeared on February 20, 2019. It stated that the U.S. Securities and Exchange Commission (“SEC”) reached a settlement agreement with Gladius Network LLC for conducting an unregistered initial coin offering (“ICO”), which the company self-reported to the SEC. What is worth keeping in mind out of this headline is that SEC reached a settlement agreement with a company that took the initiative to self-report a violation in relation to its own unregistered ICO.
The business case: The founders of Gladius began developing back in 2017, a network in which participants could rent spare bandwidth and storage space on their computers and servers to people who wish to have a better security and higher efficiency (i.e. for use in defence against cyberattacks and to enhance their content delivery speed).
To support is business development and product building, Gladius created its own currency and called it “GLA Tokes” – a digital coin to be issued on a blockchain. GLA Tokens could be used to purchase/deliver services (i.e. delivery of content to servers renting out free space) to customers in the Gladius network, as well as to keep a record of those transactions.
Gladius decided to do an ICO that lasted two months from October 2017 through December 2017. It sold its tokens to public in exchange for Eather and raised approximately $12.7 million. However out of ignorance, sloppy advice or short slightness it did not register the offering pursuant to the federal securities laws, nor did it seek to qualify for an exemption to the registration requirements. Thus Gladius was breaking the law.
There were two major issues raised by SEC.
- First, the issue of whether a GLA Token is a security. The answer to this question is determined under the Howey test.
- Second, SEC had already issued an opinion with DAO. Hence the GLA tokens’ ICO was conducted after the SEC had issued its DAO report. In this report SEC 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.
Hence, Gladius could not claim that there was no similar event taken place before its own ICO and that no guidance was given by SEC. Under the settlement, Gladius agreed to
- return funds to those investors who purchased tokens in the ICO and requested a return of funds,
- register its tokens as securities pursuant to the Securities Exchange Act of 1934, and
- file periodic reports with the Commission.
What makes this case stand out is the Gladius took the initiative to self-reported the violation to the SEC back in 2018. The SEC did not impose penalties but made it clear that all companies must follow the securities laws when issuing digital tokens.
According to Chief of the Securities and Exchange Commission’s cyber unit, Robert A Cohen, “Gladius shows us the benefit of self-reporting and taking proactive steps to remedy the situation. Today’s case shows the benefit of self-reporting and taking proactive steps to remediate unregistered offerings.”
The investigation was supervised by Mr. Cohen and was conducted by Marc E. Johnson of the Enforcement Division’s Cyber Unit and Laura K. D’Allaird.
It is the first known case where SEC has settled without charging a company in relation to ICOs. The fact that Gladius expressed an interest in taking prompt remedial steps, cooperated with the investigation and agreed to compensate investors were detrimental to SECs non charing decision. This should be contrasted 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 to all companies that had ICOs, – there are benefits to self-reporting.
Athanasios Ladopoulos is authoring for CryptoAdvangedPro in the Crypto-Finance and Crypto-Economics for Businesses sections. He is also the MD of 2SPro Group a Blockchain and Business consultancy, CIO of Lapo.io a blockchain technology and cryptocurrency company, and founder of MOOCTES.com a marketplace and tutoring company for MOOCs powered by Artificial Intelligence.