On Being Open and Honest With Regulators: The Gladius Network Cease & Desist Order and the SEC’s Map for ICO Remediation

For the third time since November 2018, on February 20, 2019, the SEC issued a cease and desist order relating to an initial coin offering (ICO) which set forth the steps for remediation of an unregistered securities offering, this time for Gladius Network, LLC (the “Gladius Order”).

Like the prior two decisions, Airfox and Paragon Coin, among other things, the SEC required the issuer to register the unregistered securities as securities and required notice of, and an offer of rescission to, its purchasers. But—unlike the Paragon and Airfox orders—Gladius was not fined.

Collectively, these cease and desist orders are important because they set out what many Fintech regulatory lawyers and others, have requested—a path for ICO remediation.

The path is now clear:  comply with SEC reporting requirements, offer a right of rescission to the investors, notify the investors, and pay a fine, unless of course, you follow Gladius’ lead and directly approach the SEC.

As a direct result of Gladius’ initiative, and unlike the Paragon and Airfox orders – no fine was issued to Gladius.

ICO Regulatory Recap

The vast majority of ICOs conducted during the ICO boom of 2017 (the “ICO Boom”), raised capital in a manner that would qualify the issued “coin” as securities under US law. Many ICOs used a form called a SAFT or Simple Agreement for Future Tokens.  The SAFT was based on an agreement called a SAFE, or Simple Agreement for Future Equity. Basing an ICO on a SAFE was a somewhat risky proposition since, in May of 2017, the SEC described a SAFE as “neither simple nor safe.”

The form of SAFT most commonly used purported to be a “commercial instrument used to convey rights in tokens prior to the development of the tokens’ functionality”.

While this kind of innovative thinking is commendable, the SAFT structure was not approved by the SEC, which later effectively condemned the SAFT by various enforcement actions, culminating in a bevy of cease and desist orders, asserting that “tokens” issued by ICOs were unregistered securities offerings.

On Confessions and Cooperation

In April  2018, the SEC was reported to have served subpoenas on over 80 entities related to ICOs.

While the contents and the subjects of the subpoenas are not publicly known, and assuming those subpoenas represented only issuers, that leaves over 350 issuers that have potential liability for offering unregistered securities during the busiest 5 months of the ICO Boom.

For those issuers that remain untouched, the Gladius Order is instructive – it demonstrates that issuers who proactively and voluntarily seek to remediate an unregistered securities offering can avoid fines.

Indeed the SEC made a point of highlighting Gladius’ cooperation in not issuing a fine.

The Gladius Order states:

“The Commission is not imposing a penalty because of the significant steps Gladius took to remediate the violation. Gladius, which was evaluating the applicability of the federal securities laws to its ICO, self-reported to staff in the Commission’s Division of Enforcement in the summer of 2018, and informed Commission staff that it wanted to do what was necessary to take prompt remedial steps. It cooperated with the staff’s investigation, providing information quickly and in a form useful to the staff. It also voluntarily agreed to the remedial steps listed in the undertakings in this order, including the provision of compensation to investors.”

The Gladius Order should be taken into consideration by those entities that have thus far avoided SEC scrutiny but raised money via SAFT, or otherwise were promised or received tokens, particularly where the underlying platform had yet to be developed.  ICO issuers, entrepreneurs and investors who participated in ICOs should consult with experienced counsel—preferably counsel that did not participate in or advise any ICOs—to determine the best course of action.


Jason A. Nagi, Shareholder, Polsinelli. Jason uses his creditor-focused, finance experience to counsel early stage and mature Fintech companies as well as traditional and non-traditional lenders, in both business ventures and litigation.  In addition to appearing before state courts, and US federal district and bankruptcy courts, Jason regularly counsels companies in applying blockchain technology to their respective industries, fundraising efforts, and regulatory issues.  Jason advises clients on SEC, CFTC, FinCEN, and state-level MSBs, including the issuance of tokenized securities. Jason represents securitized lenders, special servicers, banks, and private lenders in enforcing distressed commercial loans, conducting sales via the Uniform Commercial Code, fraudulent transfer actions, and through every stage of insolvency proceedings.

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