Recently, the SEC settled charges against a company named Gladius Network LLC for raising money with an ICO without registering nor qualifying for an exemption from registration.
Gladius raised $12.7 million with an ICO from October 2017 to December 2017, after the SEC published the DAO Investigative Report (“DAO Report”). The DAO Report was the SEC’s first warning to the ICO industry that the securities laws apply to them.
One of the warnings in the DAO Report was that the securities laws may apply to companies raising money with ICOs and that if they are offering and selling securities in their ICO, they must register with the SEC unless they qualify for an exemption.
Registration is the process most companies take when going public. It costs upwards of a million dollars and requires waiting for the SEC’s approval. Because the expense is cost-prohibitive for most startups, startups commonly rely on exemptions that do not require registration when they want to raise money by selling securities--for example, when they raise money by selling shares of their company.
Gladius raised money by selling GLA tokens in its ICO without registering nor qualifying for an exemption. In summer of 2018, Gladius reached out to SEC staff about its concerns with its ICO and desire to take prompt remedial action. The SEC conducted an investigation and determined that the GLA tokens were securities. Because of this, Gladius had violated the U.S. securities laws because they neither registered with the SEC nor used any exemption that would’ve allowed them to offer and sell the securities without having to register.
Despite Gladius’ violation, the SEC decided not to impose any penalties against Gladius because they self-reported, cooperated with the SEC’s investigation and agreed to take prompt remedial action as set forth by the SEC, including 1) registering their tokens as securities; 2) offering their investors a refund; and 3) filing periodic reports with the SEC.
Similarity to Previous Cases Where SEC Charged Companies with Conducting Unlawful ICOs
Like Gladius, neither Paragon and Airfox committed any fraud in connection with their ICOs and were charged solely with offering and selling securities without registering or qualifying for an exemption. Similarly, both Paragon and Airfox were required to offer their investors a refund, register with the SEC, and also file periodic reports with the SEC.
Unlike Paragon and Airfox, which were fined $250,000 each, Gladius was not required to pay a fine. This was in part because they self-reported. Robert Cohen, chief of the SEC’s Cyber Unit stated in the SEC’s press release, “Today’s case shows the benefit of self-reporting and taking proactive steps to remediate unregistered offerings.” In other words, the SEC is encouraging companies that conducted ICOs in violation of federal securities laws to turn themselves in to the SEC in exchange for a more favorable settlement than would be offered otherwise.
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