If you are a token investor in the United States, the Securities and Exchange Commission (SEC) has an important message for you. In the latest advisory from the commission’s Office of Investor Education and Advocacy, crypto investors should be wary of the Initial Exchange Offerings (IEOs).
Basically, the SEC thinks that IEOs are reincarnations of the much-maligned ICOs (Initial Coin Offerings) which led to significant losses for several investors. Similar to the now-defunct ICOs, the SEC states that iEOs could be unregistered securities offerings and therefore investors should stay away from them.
“As in the case of ICOs, depending on the facts and circumstances of the offering, the offering may involve the offer and sale of securities. This means the IEO may be subject to registration requirements that apply to offerings under the federal securities laws. Among other things, registration means that the company offering the digital asset has to provide important disclosures about itself, its business, the digital asset offered, and the terms of the offering to investors,” the SEC notice reads.
IEOs are token offerings hosted and mainly conducted by registered trading platforms. The model was introduced over the last year when it was evident that ICOs were dying a slow death. Binance exchange, arguably the creator of the model, launched its IEO platform dubbed the Binance Launchpad in early 2019 ushering in a new wave of investor enthusiasm that led to the popularity of the IEO model.
Now several crypto trading platforms including Bitfinex, KuCoin and Huobi all host token launches for select startup blockchain projects. IEOs are essentially similar to ICOs except for the part that instead of the company conducting a token sale, the trading platform does it for them. This arrangement helps with endorsing the project giving investors more confidence in the new company.
Despite the improvement in investor protection through these “vetted” platforms, the SEC maintains that there is a chance of investor manipulation and propagation of dales promises that lead to losses for naïve investors.
“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.”
So, what is the commission’s advice?
“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 is a red flag.” The commission also added that “There is no such thing as an SEC-approved IEO.”
Investors can check whether or not an IEO project has been registered with the SEC on their online resource dubbed EDGAR database.