The Securities and Exchange Commission’s (SEC) Office of Investor Education and Advocacy issued an Investor Alert in January that urged investors to use caution before investing in “so-called initial exchange offerings” (IEO) through online digital asset trading platforms.
The regulator noted that IEOs are a recent development in the rapidly evolving digital asset space and likened them to earlier initial coin offerings (ICO) as they are initial offerings of digital assets – such as coins or tokens – to raise capital. The IEOs are often marketed as more innovative than ICOs because they are offered directly by online trading platforms on behalf of companies, typically for a fee, and provide immediate trading.
Of IEOs, the SEC said: “Be cautious if considering an investment in an IEO. Claims of new technologies and financial products, such as those associated with digital asset offerings, and claims that IEOs are vetted by trading platforms, can be used improperly to entice investors with the false promise of high returns in a new investment space.”
In addition, the regulator warned that “IEOs may be conducted in violation of the federal securities laws and lack many of the investor protections of registered and exempt securities offerings.”
Investors should consider it a red flag if the IEO and its participants, including the online trading platform, do not address or discuss the applicability of the federal securities laws, the SEC cautioned, noting: “The past few years have seen opportunistic fraudsters take advantage of the quickly evolving investment space around digital assets, ‘cryptocurrencies’ and ICOs to conduct fraudulent schemes. The development of IEOs provides a similar opportunity for fraudsters. Investors should be careful.”
Other primary concerns flagged in the alert are that these online trading platforms, which are typically not registered with the SEC, may improperly refer to themselves as exchanges, claiming to perform due diligence or other quality assessments of the IEOs, without compliant registration as an exchange. Additionally, the online trading platform involved in an IEO may also be acting as a broker or dealer that is required to register with the SEC and become a member of a self-regulatory organization, typically FINRA, although has not registered. According to the SEC, the investor should further be aware that any offering purporting to avoid the federal securities laws because it is occurring on an overseas trading platform but otherwise allows persons from the United States to invest may still be subject to federal securities laws in the United States and in some cases leave the investor without effective legal remedies in U.S. courts against such offshore trading platforms or IEOs issuing on the platforms.
The SEC also provided a Q&A in the alert to further educate investors regarding IEOs.
Additional Investor Resources
To learn more about red flags to consider with unregistered offerings, see the SEC’s Investor Bulletin.
To learn more about the dangers of unregistered trading platforms, see the Statement on Potentially Unlawful Online Platforms for Trading Digital Assets and the Statement on Digital Asset Securities Issuance and Trading by the SEC’s staff.
For additional investor educational information, see the SEC’s website for individual investors.