Securities and Exchange Commission Office of Investor Education and Advocacy has issued a warning notice to the investors to remain vigilant towards Initial Exchange Offering (IEO) projects. 

The cautionary notice released few guidelines about how the IEOs are similar to ICOs but are often advertised as safer than ICOs as they are being offered directly through the trading platforms.

How the capital raising methods have changed in the past years?

Capital raising methods have witnessed a significant change in the last couple of years. Considering the cryptocurrency industry, 2017 to 2019 have observed various methods of capital generation. This industry has been offering ICOs, STOs, DSOs, and Initial Exchange Offerings (IEO).

ICOs have been deprecated a lot because of numerous frauds associated with them in the past years.

With certain alterations, IEOs were replaced by ICOs before investors moved to STOs as the IEOs are considered more secure than ICOs because of their legitimate status and compliance under regulatory norms.

However, as per the Securities and Exchange Commission (SEC), they are not fully secured and thus it has issued a warning notice to protect the interests of investors who already have invested or are willing to invest in the IEO projects.

The SEC Warning

The Warning clearly indicates that there is no such thing as an approved IEO. SEC states that several IEO projects are selling their securities intentionally or unintentionally as utility tokens.

Excerpts from the notice states:

1) Project is Registered under SEC or not?

As per the SEC, the IEO may offer and sell securities, this means “IEO may be subject to registration requirements that apply to offerings under the federal securities laws. Registration means that the company offering digital asset has to provide important disclosures about itself, its business, the digital asset offered, and the terms of the offering to investors.”

2) Is the platform a Securities Exchange?

If the IEO involves securities, the involved online platform from which they are offered should be registered with the SEC as a national Security exchange or alternative trading system (ATS) to operate legally under US jurisdiction. The platform may also be acting as an intermediary broker or dealer, which needs to be registered as well along with FINRA membership.

3) Scrutinize the IEO Project carefully before Investing

SEC further warns that the investors might get lucrative offers about the new technologies and financial products associated with digital asset offerings. And hype that IEOs are evaluated by trading platforms. The investors might be misled by false promises of handsome returns in the new investment projects. The IEO projects might have violated certain Federal security laws and may lack necessary investors’ protection measures.

4) Ventures outside the US need Approval from SEC

The SEC stated that the IEO projects which are functioning out of the US and are offering IEOs within the US boundaries are still liable to follow the securities laws of the US. Offshore trading platforms may mislead the investors by providing them illusory information about the IEO issuer, digital assets offered that may mislead them to invest in particular IEO 

The Alert has been issued to the investors that they should be vigilant towards the IEO issuers and that the US Court might not provide them legal remedies if they are duped by the trading platforms.

More about the Securities and Exchange Commission (SEC)

The Securities and Exchange Commission is an independent regulatory body of the US government which protects investors’ interests, monitors regulatory affairs of security markets, crypto assets and enforce laws to regulate the industry.

SSC is currently headed by Chairman Jay Clayton. From the last couple of years, the SEC has been meticulously monitoring the ICO, STO and IEO projects and has been taking stringent action against the fraud projects. Recently it has proposed various amendments including the definition of accredited investor.

Jayashree Ingle

CBW - External Analyst

INDIA