Botched ICO: Self-Reporting Wins Again

Another week, another message that self-disclosure of corporate misconduct brings rewards. This time, the SEC let a tech company off with a regulatory wrist-slap after the firm confessed to conducting an unregistered initial coin offering.

ICOs are all the rage these days among certain technology companies, whose founders probably read too much Ayn Rand in high school. They are akin to initial public offerings in that investors give the company money to fund business operations, but the dupes and get-rich-quick dreamers investors get cryptocurrency tokens instead of stock.

Anyway, the Securities and Exchange Commission does consider ICOs to be public offerings subject to all the usual federal securities laws. It has warned firms of that point numerous times, and last November dinged two tech companies $250,000 each for unregistered ICOs.

Enter Gladius Network Corp., a company in Washington, D.C. that rents spare network bandwidth and then uses it to defend against cybersecurity attacks or improve the data delivery speeds of other companies. Gladius (the word is Latin for “sword”) conducted an unregistered ICO in 2017 that raised the company $12.7 million.

Unlike the prior two companies, however, Gladius approached the SEC in August 2018 and self-reported its ICO blunder. As the SEC said in its settlement order:

From the beginning of its discussions with Commission staff, Gladius expressed an interest in taking prompt remedial steps and complying with the federal securities laws going forward. Gladius 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

Gladius has also offered to refund money to its ICO investors if they so choose.

“The SEC has been clear that companies must comply with the securities laws when issuing digital tokens that are securities,” Robert Cohen, chief of the SEC’s cyber unit, said in an SEC statement. “Today’s case shows the benefit of self-reporting and taking proactive steps to remediate unregistered offerings.”

This Gladius enforcement action isn’t a big deal unto itself. Rather, for ethics and compliance officers, it’s simply the latest in a line of examples where regulators look favorably on companies that self-disclose misconduct.

That’s a message compliance officers can keep repeating to their boards and CEOs, ad nauseam.

Just last week we saw the extraordinary case of Cognizant Technologies, where the Justice Department declined to file criminal FCPA charges against the company even though two of its most senior executives were indicted for masterminding a bribery scheme. Why such a striking departure from standard prosecution guidelines? Because, among other factors, Cognizant’s board self-disclosed the misconduct immediately.

We’re going to see that message again and again in the future: disclosure and cooperation bring benefits. If it’s true even in the whacky and sketchy world of ICOs, it’s true in your world too.

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