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SEC issues IEO investor alert

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The investor alert was published by the SEC’s Office of Investor Education and Advocacy. The alert says that investors should, "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.”

Notably, the SEC said, "IEOs may be conducted in violation of the federal securities laws and lack many of the investor protections of registered and exempt securities offerings."

What is an IEO?

Initial exchange offerings (IEOs) are a recent development in the crypto asset space. IEOs are similar to initial coin offerings (ICOs) in that they are initial offerings of crypto assets to raise capital. IEOs were seen as a natural evolution of the ICO model because they are offered directly by crypto exchange platforms on behalf of companies—usually for a fee—to provide immediate trading opportunities for crypto assets. One of the perceived improvements of the IEO model is that exchanges vet projects to ensure that only higher quality projects can participate.

On these points, the SEC said, “These online trading platforms, which are typically not registered with the SEC and which may improperly refer to themselves as ‘exchanges,’ may also claim to perform due diligence or other quality assessments of the IEOs.”

Is an IEO a securities offering?

The SEC said that there are important issues investors should be aware of before investing in an IEO. “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 alert also provides guidance on whether an exchange is likely to be a securities platform or a broker-dealer, and whether U.S. investors can invest in IEOs that are conducted by companies based outside of the U.S.

"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," said the agency.

What comes next after IEOs?

While the modest 2019 IEO boom failed to achieve the same level of interest as the 2017 ICO phenomenon, the warning from the SEC is likely to throw more cold water over a fund-raising model that is already cooling off.

The SEC said, “Saying something is registered doesn’t make it so_. _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.”

Given that the SEC has shown a willingness to prosecute entities it deems to have held unregistered securities offerings, perhaps the next evolution of the model is the much anticipated Securities Token Offering (STO), which is designed to be conducted on a much firmer regulatory footing.



News, Khareem Sudlow