SEC alerts investors against initial exchange offerings

After millions of dollars were lost by investors due to failed, or illegitimate, initial coin offerings (ICO) in the cryptocurrency space the past several years, there’s a new investment vehicle being touted. Initial Exchange Offerings (IEOs), investment options offered by online exchanges on behalf of crypto and blockchain entities, are starting to see an uptick in activity, much to the disappointment of the U.S. Securities and Exchange Commission (SEC).

The financial regulator just released a warning to investors, cautioning them to approach IEOs with a great deal of trepidation and care.

In its alert, the SEC explains, “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.”

The commission is concerned that some crypto-based companies may try to use the new product much in the same manner ICOs were used in an attempt to collect funds for projects that are never realized. It states that an IEO could potentially sell securities, depending on how it is structured, which would make it responsible for securities registration procedures. As was seen with ICOs, many companies didn’t follow those requirements, and the SEC is still going after a number of entities for improper and, in some cases, illegal business practices related to their offerings.

For any exchange to offer an IEO to U.S. investors, the SEC asserts that “the online trading platform on which the IEO is being offered 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 (ATS). An ATS must be a registered broker-dealer and comply with applicable requirements in order to legally operate in the United States.”

IEOs should also be avoided by U.S. investors if offered from an overseas location in an effort to avoid the country’s securities reporting obligations. Investors would have no recourse if something were to go wrong with their offshore investments.

Some high-profile IEOs have already popped up, including one by and another potential launch by Coinbase, through its operations in Asia. Neither is expected to be directed toward U.S. investors, but the inherent nature of the Internet means that U.S. netizens won’t be able to avoid seeing information about the initiatives.

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