Trouble regarding initial coin offerings (ICOs) and cryptocurrencies continues to occupy a significant place in our industry's spotlight.
In late February, the Securities and Exchange Commission's enforcement branch charged Gladius Network LLC with conducting an unregistered initial coin offering (ICO).
ICOs May Be Considered Securities
Gladius self-reported an improperly conducted ICO that occurred in late 2017, after the Commission's DAO Report of Investigation warned that ICOs may, in some cases, be classified as securities and are subject to registration-and other federal securities regulations-in order to be offered for sale.
Through this ICO, Gladius raised approximately $12.7 million in digital assets to finance a plan to rent spare computer bandwidth to be used to protect against cyberattacks and enhance delivery speed.
The ICO was not registered under the applicable federal securities laws and was not qualified to receive an exemption from the applicable registration requirements.
Gladius took action to remedy the situation by alerting the SEC's enforcement division of its wrongdoing in the summer of 2018, and expressed the desire to take corrective action, subsequently cooperating with the SEC's investigation.
Merit Found in Self-reporting
In accordance with the enforcement decision, Gladius has agreed to take (or has already made) the following remediation steps:
- Register the tokens as securities in accordance with the Securities Exchange Act of 1934 ("SEA")
-
Duly compensate investors who purchased tokens in the ICO and have requested or will request a return of funds
- Electronically notify all potential claimants (i.e., Gladius investors) of a claim form for investors who purchased GLA Tokens on or before 12/31/2017 of their right to recover their initial monies invested, with interest, less any income they may have received
- Make timely filings of those §13(a) reports under the SEA
Gladius consented to the order without admitting or denying the findings, and, as a result of self-reporting the wrongdoing and agreeing to the above reparations, has received no penalty from the SEC's enforcement division.
The Importance of Analysis Prior to the Offering
The SEC certainly has sent a clear message that those companies who issue ICOs should be forewarned and carefully consider whether the offering requires registration. Failure to head these warnings can be extremely costly, and forever damage a company's reputation.
This particular case reveals the need for careful analysis and investigation prior to the offering to avoid any unintentional wrongdoing.
First, firms should consider the nature of the offering, particularly those which are ICOs, which may be classified as securities, and take steps towards registration accordingly, as needed.
Second, where applicable, be sure that past offerings have been conducted in accordance with regulations - and if necessary, speak to counsel about the pros and cons of self-reporting.
By finding missteps on their own, prior to the SEC's investigation, firms can express their willingness to take corrective actions. -In the case of Gladius, this resulted in no assessment of a penalty, which would have been potentially exorbitant.
The outcome of the Gladius enforcement supports the possibility of lesser consequences when wrongdoing is self-reported, whereas being investigated and enforced at some future date could surely bring more severe penalties.
Developing ICO Internal Controls: We Can Help
The risk of mistakes and subsequent enforcement for entrepreneurs and investors still relatively inexperienced in the undefined cryptocurrency market is high.
Should your firm need help with its ICO analysis and investigation, with shoring up its policies and procedures that guide ICO internal controls and cryptocurrency trading, or with any other legal matters, the expert attorneys at Jacko Law Group, PC, can help.
Trouble regarding initial coin offerings (ICOs) and cryptocurrencies continues to occupy a significant place in our industry's spotlight.
In late February, the Securities and Exchange Commission's enforcement branch charged Gladius Network LLC with conducting an unregistered initial coin offering (ICO).
ICOs May Be Considered Securities
Gladius self-reported an improperly conducted ICO that occurred in late 2017, after the Commission's DAO Report of Investigation warned that ICOs may, in some cases, be classified as securities and are subject to registration-and other federal securities regulations-in order to be offered for sale.
Through this ICO, Gladius raised approximately $12.7 million in digital assets to finance a plan to rent spare computer bandwidth to be used to protect against cyberattacks and enhance delivery speed.
The ICO was not registered under the applicable federal securities laws and was not qualified to receive an exemption from the applicable registration requirements.
Gladius took action to remedy the situation by alerting the SEC's enforcement division of its wrongdoing in the summer of 2018, and expressed the desire to take corrective action, subsequently cooperating with the SEC's investigation.
Merit Found in Self-reporting
In accordance with the enforcement decision, Gladius has agreed to take (or has already made) the following remediation steps:
- Register the tokens as securities in accordance with the Securities Exchange Act of 1934 ("SEA")
-
Duly compensate investors who purchased tokens in the ICO and have requested or will request a return of funds
- Electronically notify all potential claimants (i.e., Gladius investors) of a claim form for investors who purchased GLA Tokens on or before 12/31/2017 of their right to recover their initial monies invested, with interest, less any income they may have received
- Make timely filings of those §13(a) reports under the SEA
Gladius consented to the order without admitting or denying the findings, and, as a result of self-reporting the wrongdoing and agreeing to the above reparations, has received no penalty from the SEC's enforcement division.
The Importance of Analysis Prior to the Offering
The SEC certainly has sent a clear message that those companies who issue ICOs should be forewarned and carefully consider whether the offering requires registration. Failure to head these warnings can be extremely costly, and forever damage a company's reputation.
This particular case reveals the need for careful analysis and investigation prior to the offering to avoid any unintentional wrongdoing.
First, firms should consider the nature of the offering, particularly those which are ICOs, which may be classified as securities, and take steps towards registration accordingly, as needed.
Second, where applicable, be sure that past offerings have been conducted in accordance with regulations - and if necessary, speak to counsel about the pros and cons of self-reporting.
By finding missteps on their own, prior to the SEC's investigation, firms can express their willingness to take corrective actions. -In the case of Gladius, this resulted in no assessment of a penalty, which would have been potentially exorbitant.
The outcome of the Gladius enforcement supports the possibility of lesser consequences when wrongdoing is self-reported, whereas being investigated and enforced at some future date could surely bring more severe penalties.
Developing ICO Internal Controls: We Can Help
The risk of mistakes and subsequent enforcement for entrepreneurs and investors still relatively inexperienced in the undefined cryptocurrency market is high.
Should your firm need help with its ICO analysis and investigation, with shoring up its policies and procedures that guide ICO internal controls and cryptocurrency trading, or with any other legal matters, the expert attorneys at Jacko Law Group, PC, can help.
