Why You Should Avoid Unregistered Initial Exchange Offerings

The alert stated that IEO fundraising may be lacking many of the investor protections of registered and exempt securities offerings. 

Initial exchange offerings are token offerings conducted on the platform of a cryptocurrency exchange in much the same way that securities are offered on a securities exchange. Tokens offered in an IEO are immediately tradable and give more publicity to projects, plus exchanges give investors some comfort by promising to vet the projects they offer on their platform.

However, the SEC has cautioned that there are important issues investors should be aware of before investing in an IEO. First, it claims that IEOs that are vetted by trading platforms could be used improperly to entice investors with the false promise of high returns in a new investment space.     This means that unless an exemption applies, the IEO may have to be registered with the regulator. 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.

Any exchanges that offer initial exchange offerings involving securities may also need to register with the SEC as a national securities exchange or alternative trading system. And those offering brokerage services would have to register as broker dealers.

Why It Matters

Investors should carefully consider whether the company and the trading platform involved in the IEO has complied with federal securities laws. Even offerings claiming to avoid the US federal securities laws because it is occurring on an overseas trading platform while allowing US citizens to invest is also a red flag. 

Investors should also be mindful that they may have no effective legal remedies in US courts against offshore trading platforms or initial exchange offerings conducted on the platforms. Even if investors successfully sued in a US court, they may not be able to collect on a US judgment against a foreign company, entity or person. 

As for IEO issuers, you should use caution when launching your tokens through an initial exchange offering, and understand that your obligations to comply with federal securities laws are not excused by offering the tokens on an exchange.