A U.S.-based cybersecurity company agreed to settle SEC charges that its initial coin offering ("ICO") constituted an unregistered securities offering under the Securities Exchange Act of 1934.
According to the SEC Order, Gladius Network LLC ("Gladius") raised approximately $12.7 million from 1,700 investors over a period of three months in 2017, when it publicly offered and sold its own proprietary digital coins in exchange for an established digital currency. The offering was a means of raising capital for the Gladius network to rent spare computer bandwidth to defend against cyberattacks. According to the SEC, these coins were securities pursuant to the Supreme Court's Howey test, under which an investment contract exists when there is an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. The action is consistent with warnings from SEC Chair Jay Clayton that tokens and offerings that incorporate features, and marketing efforts that emphasize the potential for profits, bear the hallmarks of securities.
Due to Gladius' self-reporting, cooperation, and the remedial steps that it undertook (including offering refunds to investors who participated in the ICO, revising its website and marketing materials, and registering the coins as securities), the SEC decided not to impose a financial penalty.
Commentary / Joseph V. Moreno
The SEC's Cyber Unit has struck again, cracking down on yet another unregistered ICO but displaying leniency in refraining from imposing a fine. As with other regulatory regimes such as the FCPA and AML/CFT, the SEC placed significant emphasis on Gladius' proactive efforts to self-report its deficiencies and cooperate with regulators in remediating them. However, the registration by Gladius of its coins as securities will bring with it considerable and costly compliance obligations that are often viewed as strangling the growth of high-tech startups. Time will tell whether such obligations will become accepted as simply the cost of doing business, or if dissenting voices who recommend a lighter regulatory touch on the cryptocurrency industry, such as that of Commissioner Hester Peirce, will prevail.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
