With initial coin offerings (ICOs) virtually gone and initial exchange offerings (IEOs) now dominating the crypto industry as the newest method of fundraising for blockchain projects, the United States Security and Exchange Commission (SEC) has warned US investors to be cautious when investing in them.
According to the Commission, crypto exchanges conducting Initial exchange offerings are usually not registered with the SEC. This is a regulatory violation as IEOs “lack many of the investor protections of registered and exempt securities offerings.”
“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.” – SEC warns.
IEOs May Be Classified As Securities Offerings
Despite being branded as an innovation of ICOs, the US regulator noted that IEOs might involve the sales of securities. Hence, IEO issuers may be subject to the same registration requirements that apply to offerings under federal securities laws.
According to the SEC, if the IEO involves securities, then the exchange facilitating the sale may be required to register with the regulatory body separately “as a securities exchange or operate pursuant to an exemption,” like an alternative trading system (ATS) to protect investors from fraud.
“An ATS must be a registered broker-dealer and comply with applicable requirements in order to legally operate in the United States. The federal laws and regulations governing registered national securities exchanges and ATSs are designed to protect investors and prevent fraudulent and manipulative trading practices.” – The regulator explained.
If an IEO and the trading platform supporting the fundraising fail to comply with the Federal securities laws, then the IEO or the exchange may be operating unlawfully with no investor protections. Additionally, an IEO or exchange can claim that they are registered, but that doesn’t make it true. “There is no such thing as an SEC-approved IEO,” the SEC adds.
SEC Continues To Clamp Down On ICO Projects
Although the ICO season is over, the US regulator is still investigating and penalizing fraudulent projects as well as those that did not comply with federal securities laws.
In October 2019, the SEC slammed Block.one, the company behind EOS blockchain, with a $24 million fine for not selling unregistered securities in the form of an ICO.
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