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The SEC’s Most Recent ICO Enforcement Action: A Possible SEC Enforcement Action Roadmap for Unregistered Offerings?

March 5, 2019

The Securities and Exchange Commission’s (SEC) recent ICO enforcement action against Gladius Network LLC (Gladius)—which includes a rescission offer but does not include any civil penalty—appears to be designed to encourage blockchain developers to self-report potential violations of the securities registration provisions of the Securities Act of 1933.1 In explaining its decision not to impose a civil penalty, the SEC noted that Gladius self-reported the matter, took prompt remedial steps, and cooperated with the investigation.2 This enforcement action also sheds further light on the key factual aspects that the SEC focuses on in determining whether a digital asset is a security. 

On February 20, 2019, the SEC issued a settled order finding that Gladius had conducted an unlawfully unregistered public ICO, raising ether with a value of approximately $12.7 million from approximately 1,700 purchasers between October and December 2017. The SEC found that Gladius did not prohibit sales to non-US persons and did not limit sales in the United States to accredited investors. The SEC also found that Gladius did not register its ICO with the SEC, nor did it qualify for any exemption from registration.

The SEC referenced a number of factors in making its conclusion that GLA tokens were securities, including the following:

  • Statements regarding increased adoption and token appreciation.
    • Discussions of prospects for investment returns included a Gladius webpage that stated, “[a]s more websites join, the value of the Token should rise with the demand.”
    • A post on social media by a Gladius member stated, “as our platform grows and more websites buy our services, the value of the coin increases.”
  • Statements of future exchange listings. 
    • Gladius stated that GLA tokens would be listed on digital asset trading platforms and made significant efforts to provide secondary trading opportunities.
    • On a Gladius web page, Gladius principals said that “[w]e’ve been approached by some of the largest exchanges, they're very interested.”
    • Following the ICO, Gladius posted on its website that it had entered a “partnership” to make the GLA token available to trade on “one of the top cryptocurrency exchanges in the world!”
  • Statements targeting cryptocurrency investors
    • Gladius targeted some of its marketing efforts toward blogs and forums frequented by cryptocurrency enthusiasts and investors.
  • Use of proceeds for continuing development of the platform
    • The Gladius whitepaper indicated that 40% of the funds raised would go towards “completing” the development of the network, 20% of the funds would go towards developing “tight security” for the network, 20% would go towards day-to-day operations of the system, 10% would go to legal expenses for the company, and 10% would go towards marketing the company.

The SEC reasoned that these factors, along with Gladius’ promotion of the token and Gladius’ platform, created for GLA token purchasers a reasonable expectation of profit.

As part of the settlement, Gladius agreed to file a registration statement to register the GLA tokens as securities under the Exchange Act, and—for covered persons who timely make claims that are substantiated—to return “the consideration paid for such security with interest thereon… or for damages if [the purchaser] no longer owns the security.” The settlement does not expressly address secondary purchasers of GLA tokens (such as those that may have acquired GLA tokens through a digital asset trading platform). Nor does the order specify whether purchasers electing rescission (or damages) are to be paid in ether or fiat currency. In the event that Gladius might in the future plan to deregister GLA tokens because they are no longer securities, the SEC’s Order includes a provision requiring prior notice to the SEC staff and Gladius’ agreement to provide information that the SEC staff may reasonably request.

The rescission and Exchange Act remedies for Gladius are similar to those that the SEC imposed in enforcement actions against CarrierEQ, Inc., D/B/A AirFox (AirFox) and Paragon Coin, Inc. (Paragon). But, unlike AirFox and Paragon, which were ordered to pay $250,000 in civil penalties each, Gladius avoided a civil penalty by self-reporting in summer 2018, remediating, and cooperating. 

The SEC began to express its views concerning digital assets in speeches and in warning shot enforcement actions such as The DAO3 and Munchee.4 Following the imposition of civil penalties in non-fraud settlements against Airfox and Paragon, the Gladius settlement suggests that self-reporting a potential registration violation is one avenue by which digital token issuers may attempt to reach a settlement with the SEC that does not include a civil penalty.  

1 Company Settles Unregistered ICO Charges After Self-Reporting to SEC, (Feb. 20, 2019), available here

2 In the Matter of Gladius Network LLC, Securities Act Rel. No. 10608, Admin. Proc. File No. 3-19004 (Feb. 20, 2019).

3 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, Release No. 81207 (July 25, 2017), available here

4 In the Matter of Munchee, Inc., Securities Act. Rel. No 10445, Admin. Proc. File No. 3-18304 (Dec. 11, 2017), available here

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Andrew J. Geist, an O'Melveny partner licensed to practice law in New York, David L. Kirman, an O'Melveny partner licensed to practice law in California, William K. Pao, an O'Melveny partner licensed to practice law in California, Robert Plesnarski, an O'Melveny partner licensed to practice law in the District of Columbia and Pennsylvania, Eric Sibbitt, an O'Melveny partner licensed to practice law in California and New York, and Andrew A. Nizamian, an O'Melveny associate licensed to practice law in the California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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