On February 20, 2019, the Enforcement Division of the U.S. Securities and Exchange Commission (“SEC”) issued an Order Instituting Cease-And-Desist Proceedings Pursuant To Section 8a Of The Securities Act Of 1933, Making Findings, And Imposing A Cease-And-Desist Order (“Order”) [1] against Gladius Network LLC (“Gladius”) for an initial coin offering (“ICO”) allegedly conducted in violation of Sections 5(a) and 5(c) of the Securities Act of 1933. Notably, as a result of Gladius self-reporting to the Division of Enforcement in the summer of 2018, cooperating with the investigation, and taking “prompt remedial steps” in response to the Staff’s concerns, the SEC did not impose a monetary penalty in connection with this settlement.
The Gladius Network was established as a decentralized, peer-to-peer node network offering internet content providers faced with a DDoS attack or increased traffic the ability to access spare bandwidth and storage space belonging to organized “pools” of individuals and businesses (called “nodes”). In late 2017, Gladius conducted an ICO for its “GLA Token,” resulting in proceeds worth approximately $12.7 million. The objective of Gladius’s token sale was allegedly to raise the funds needed to continue developing its network and corporate infrastructure. GLA Tokens could thereafter be acquired directly from Gladius or purchased (and sold) in secondary markets. Applying the test provided in SEC v. W.J. Howey Co.[2], the SEC determined that the GLA Tokens were securities and that the sale of GLA tokens was an unregistered securities offering.
The terms of the Gladius settlement generally mirror the prior SEC settlements that were announced in November 2018, requiring Gladius to: (1) cease and desist from further violations; (2) register the GLA Tokens under Section 12(g) of the Securities Exchange Act of 1934 as a class of securities; and (3) establish a notice and claims process by which purchasers of the GLA Token through the ICO may request a refund. The noteworthy absence of the monetary penalty, however, emphasizes the value that the SEC places on self-reporting and prompt remedial action in response to alleged securities law violations. Gladius has not admitted or denied any of the SEC’s findings in connection with this settlement.