SEC Issues Alert Against Initial Exchange Offerings

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The SEC has issued an alert to investors regarding initial exchange offerings. This warning is not an official statement on regulatory policy, but it does indicate the way the American market regulators view the practice and why many exchanges are shunning U.S. investors.

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SEC Warns Investors About IEOs

The U.S. Securities and Exchange Commission’s Office of Investor Education and Advocacy has urged investors to use caution before investing in initial exchange offerings. The alert explains that IEOs are similar to initial coin offerings in that they are offerings of digital assets to raise capital, but touted as an innovation over ICOs because they are offered directly by trading platforms. The online platforms may also claim to perform due diligence or other quality assessments of the IEOs.

“Be cautious if considering an investment in an IEO,” the SEC warned. “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. IEOs may be conducted in violation of the federal securities laws and lack many of the investor protections of registered and exempt securities offerings.”

The SEC stated that, depending on the circumstances, an IEO may involve the offer and sale of securities. This means it may be subject to registration requirements under U.S. federal securities laws. If the IEO involves securities, the online trading platform on which it is being offered may need to register with the SEC as a national securities exchange or an alternative trading system (ATS) to legally operate in the United States. Further, the platform may also be acting as a broker or dealer that is required to register with the SEC as such and become a member of FINRA as well.

“It is 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 alert claims. “In addition, be careful if the promoter of the IEO or the digital trading platform hosting the IEO states that they are approved or registered with the SEC. There is no such thing as an SEC-approved IEO. It is common for a fraudster to make false and misleading statements or exaggerated claims about regulatory approvals and oversight to lure potential investors.”

Ventures Outside US Still Need Its Approval

The American regulator noted that many IEOs are offered by entities outside the country. However, it stated that if the IEO is being offered to a person in the United States then its securities laws may still apply. It added that claiming an offering to be outside U.S. securities laws just because it is occurring on an overseas trading platform is a red flag in itself.

“Offshore trading platforms that attempt to avoid regulatory scrutiny can leave investors without important information, including information about the IEO issuer, the digital asset offered, and any arrangements between the trading platforms and IEO issuers that enable them to make informed judgments about whether to invest in an IEO,” the SEC warned.

The alert also warned American investors that they should be mindful that they may not have effective legal remedies in U.S. courts against offshore trading platforms or IEOs issuing on these platforms.

What do you think about the SEC issuing an alert against initial exchange offerings? Share your thoughts in the comments section below.

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