Cryptocurrencies,  Regulation

SEC warns investors about initial exchange offerings

IEOs are the new ICOs, and the financial watchdog wants investors to take heed

The SEC wants you to know that initial exchange offerings, which have taken off like a bushfire in the last year, are really no different than initial coin offerings. 

The agency issued an alert Tuesday, urging investors to proceed with caution before investing in IEOs through online trading platforms—which often label themselves as exchanges—especially when those platforms are located overseas. 

IEOs are similar to ICOs in that they offer digital tokens that companies use to raise capital. The only difference is that IEOs are offered via online cryptocurrency exchanges on behalf of companies—usually for a fee. Because of this, they are often touted as a type of new-fangled ICO that is somehow immune to U.S. securities law—but they are not. 

Many of these IEOs fail to comply with federal securities laws and lack proper investor protections, even though the trading platforms may “claim to perform due diligence or other quality assessments,” the SEC said.

Lawyer, analyst respond

“Your honor, I’d like to buy a vowel,” well-known cryptocurrency lawyer Stephen Palley said mockingly in a Twitter thread

“Apparently, updating a vowel didn’t convince the SEC that IEOs were any less subject to US securities laws than ICOs,” he continued.  

“Oh, also don’t forget that you might need to be a broker dealer to sell these particular flavor of schmockens,” he said, using a mash-up of the words “schmuck” and “token,” which he took credit for.

 

Financial markets analyst Mati Greenspan took a more serious tone, but came to the same conclusion.

“It’s about time they caught up,” he told Modern Consensus via direct message. “It seems like the rush of IEOs has slowed down significantly over the last few months. So the SEC coming out against them now just shows how once again they are behind the trend.”

Indeed, the warning comes at a time when Binance, a large cryptocurrency exchange headquartered in Malta, has been selling IEO tokens aplenty via its Binance Launchpad

In another striking example, Bitfinex, a crytpo exchange registered in the British Virgin Islands, raised $1 billion in 10 days via a similar type of offering in mid-2019.

Red flags 

In its warning, the SEC went on to list a number of things to look out for. 

If the IEO is selling securities—and many of the tokens sold in these offerings do qualify as securities—“it may need to register with the SEC separately as a national securities exchange or operate pursuant to an exemption, such as an alternative trading system,” the SEC said. 

Further, if the trading platform is also acting as a broker or dealer—meaning an entity that trades securities on behalf of its customer—it is required to register with the SEC and become a member of a self-regulatory organization, such as the Financial Industry Regulatory Authority.

Finally, as long as an IEO is being offered to a person in the U.S.—even if the trading platform is overseas—federal securities laws still may apply.

“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 SEC.

(Update on Jan. 14, 10 p.m., changed first subhead.)




Amy Castor has more than 20 years' experience in journalism. Her work on crypto and blockchain has appeared in consumer and trade publications throughout the U.S., including CoinDesk, Forbes, Bitcoin Magazine, and The Block.