The regulator mention that these token sales usually conducted on third-party crypto exchanges to unite crypto projects with potential investors are similar to initial coin offerings (ICOs), and thus could be subject to securities law existing in the United States.
The SEC in its latest investor alert, posed and answered several questions concerning what citizens must consider before deciding whether or not to invest in an IEO, even though the exchanges promise that they’ve done due diligence or other quality assessments of the projects.
The regulator 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.
But the primary focus of the notice is that in the same manner as ICOs, such token sales are conducted in violation of U.S federal securities laws and thus, lack many of the investor protections of registered and exempt securities offerings.
As per the SEC, any online trading platform that wants to offer such a platform to investors usually must register with the body separately as a national securities exchange or operate under an exemption, for example, an alternative trading system (ATS) validated by a broker-dealer license.
Regarding whether U.S persons can invest in IEOs, the SEC warned that federal securities laws apply. At the same time, such investors can expect that if things go wrong, they may not get effective legal remedies in U.S. courts against offshore trading platforms or the projects.
Notably, the SEC’s warning on IEOs is long overdue given it has been over a year since the new fundraising mechanism broke unto the scene, with more failure than success stories so far for investors.
On one occasion, Bitfinex suspended an $8M IEO raise for K.im, citing regulatory uncertainty. More recently, Coinfomania reported Binance Launchpad IEO, Elrond, as blaming a manipulator for the cryptocurrency’s low $0.001645 price since its token offering.