United States: SEC Credits Self-Reporting And Cooperation In Not Imposing Penalty On ICO Sponsor

Last Updated: March 11 2019
Article by Daniel M. Hawke

On February 20, 2019, the SEC announced1 a settled enforcement action against Gladius Network LLC for failing to register its 2017 initial coin offering (ICO) under the federal securities laws. Gladius, a company developing a peer-to-peer network to enable website content providers to fight distributed denial of service attacks, self-reported the violation, cooperated with the SEC enforcement staff and avoided a civil penalty.

As described in the Commission's order,2 the company conducted an ICO in late 2017 in which it publicly offered and sold "GLA Tokens" in exchange for Ether, a digital asset, to raise the capital it required to build out its network. Gladius raised roughly $12.7 million worth of Ether in its ICO. Gladius publicized through its website and social media the details of its offering and that its tokens would be available for purchase worldwide, including within the United States. Approximately 1700 investors purchased GLA Tokens, which were distributed in February, 2018.

Self-Reporting, Cooperation and Remedial Actions

In August 2018, Gladius self-reported its unregistered offering and sale of GLA Tokens to the SEC's Division of Enforcement. When it self-reported, Gladius "expressed an interest in taking prompt remedial steps" and "cooperated extensively with the staff, voluntarily providing documents and information to the Commission in a format that allowed the staff to conduct the investigation quickly and efficiently."3

The SEC found that "Gladius did not register the offering pursuant to the federal securities laws, nor did it qualify for an exemption to the registration requirements."4 As a result, the Commission found that Gladius violated Sections 5(a) and 5(c) of the Securities Act of 1933.5Without admitting or denying the Commission's findings, Gladius consented to an order in which it agreed to cease and desist from further violations of Section 5, and undertook to return funds to those investors who purchased tokens, to register its tokens as securities under the Securities Exchange Act of 1934, and to file periodic reports with the Commission.

No Penalty on Gladius

Significantly, the Commission imposed no civil penalty on Gladius. The Commission explained that "the SEC did not impose a penalty because the company self-reported the conduct, agreed to compensate investors and will register the tokens as a class of securities."6 According to Robert Cohen, Chief of the SEC's Cyber Unit, the case "shows the benefit of self-reporting and taking proactive steps to remediate unregistered offerings."7

The DAO Report of Investigation8

The Commission noted in its press release that Gladius's offering of GLA tokens occurred after the Commission had issued its DAO Report of Investigation under Section 21(a) of the Securities Exchange Act of 1934 in July, 2017. In its DAO Report, the Commission warned that ICOs could be securities offerings.9 When it issued the DAO Report, the Commission stated that "[t]he Report confirms that issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies."10

According to the SEC, the purpose of the DAO Report, which was issued in lieu of filing an enforcement action in the DAO matter, was to "caution the industry and market participants" that the federal securities laws apply to blockchain and distributed ledger technology offerings "regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using US dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology."11 In apparent reference to the DAO Report, Mr. Cohen commented in announcing the Gladius case: "The SEC has been clear that companies must comply with the securities laws when issuing digital tokens that are securities."12

Penalties For Companies that Did Not Self-Report

The Gladius case follows two similar cases instituted by the SEC on November 16, 2018 against companies that conducted unregistered ICOs but, in those cases, the companies did not self-report and were penalized by the Commission. In cases against Paragon Coin13 and Airfox,14 the SEC charged both companies with violations of Section 5 of the Securities Act and imposed civil penalties of $250,000. In both cases, the companies commenced their token offerings in or around August 2017, just weeks after the Commission's DAO Report. Paragon and Airfox raised $12 and $15 million, respectively, but did not register their offerings under the federal securities laws or qualify for an exemption from registration. In both cases, the Commission noted that it considered the remedial actions of each company and that the penalties would have been greater but for the "remedial acts undertaken by the Respondent and cooperation afforded the Commission staff."15


The Gladius case sends a clear message that self-reporting to the SEC can result in meaningful cooperation credit. While Gladius did not avoid an enforcement action, it did avoid a civil penalty. In the Paragon and Airfox cases, while both companies received credit for taking remedial actions and cooperating with the staff, neither company self-reported and both companies paid civil penalties. When taken together with the DAO Report and the enforcement actions against Paragon and Airfox, the case against Gladius offers important insight into how the SEC and its staff think about cooperation credit in resolving SEC enforcement actions. The Commission clearly intended that its DAO Report be a warning to ICO sponsors that the failure to register an offering of tokens could result in enforcement action. Through all three post-DAO cases, the Commission made clear that once it put the industry on notice that ICOs could be securities that must be registered under the federal securities laws, a party risks enforcement action by failing to do so. In Gladius, the company was able to avoid a civil penalty by self-reporting its failure to register its ICO, by offering the staff meaningful cooperation and by agreeing to undertake significant remedial actions.  While the SEC has emphasized self-reporting, cooperation, and remediation in the past, the Gladius case is one of the strongest messages sent by the current SEC regime in connection with an enforcement action – and it remains to be seen whether similar settlements will follow.


1 "Company Settles Unregistered ICO Charges After Self-Reporting to the SEC," Rel. No. 2019-15 (Feb. 20, 2019)

2 In the Matter of Gladius Network LLC , Sec. Act Rel. No 10608 (Feb. 20, 2019) .

3 Id.  at 6.

4 Id.  at 2.

5  Id. at 6.

6 Gladius Press Release.

7 Id.

8 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934, Exchange Act Rel. 81207 (July 25, 2017) (DAO Report)

9 DAO Report at 11.

10  Press Release, "SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities," Rel. No. 2017-131 (July 25, 2017)

11 Id.

12 Gladius Press Release.

13 In the Matter of Paragon Coin, Inc., Securities Act Rel. No. 10574 (November 16, 2018)(Paragon Order)

14 In the Matter of Carriereq, Inc. D/B/A Airfox, Securities Act Rel. No. 10575 (November 16, 2018) (Airfox Order)

15 Paragon Order at 9-10; Airfox Order at 8.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions