SEC warns investors: IEOs are a no go

A helpful tip from the U.S. Securities and Exchange Commission to cryptocurrency projects: You'll have to do more than swap out a letter to make your token offering safe. 

The SEC today urged prospective cryptocurrency investors "to use caution" before putting their money into initial exchange offerings (IEOs). It noted that the online trading platforms that offered them were often not registered with the SEC and may not have done their "due diligence" before listing the coin.

The federal agency has given similar warnings in the past with regard to initial coin offerings (ICOs). ICOs are token sales in which a company sells tokens or cryptocurrency to raise money for their project. According to the SEC, these tokens may in fact be unregistered securities, and investors should think carefully about their involvement. Indeed, after a bevy of scams from unscrupulous projects, ICOs have developed something of a negative connotation and companies have moved away from the term.

But initial exchange offerings promised to be different. Instead of companies selling their own tokens, a cryptocurrency exchange would do it for them. This put a perceived stamp of approval on the coin because it guaranteed that the tokens could be traded on that exchange. Binance Launchpad and Bitfinex Token Sales are two examples of IEO platforms.

One problem, however, is that some of the coins still just aren't worth anything, costing investors thousands.

And that's what the SEC is worried about. In today's investor alert, it wrote: "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." 

Moreover, it noted, some of the IEOs may still be unregistered securities offerings. The registration process requires companies to disclose certain things about the product and the business to investors. Without it, investors may be flying blind. 

Beyond the company with the token, the trading platform offering that token may have to register as a national securities exchange with the SEC or get an exemption.

The SEC suggests investors follow two rules of thumb: Stay away from an IEO that doesn't discuss federal securities laws. Conversely, it says, "Be careful if the promoter of the IEO or the digital trading platform hosting the IEO states that they are approved or registered with the SEC. There is no such thing as an SEC-approved IEO." (The public can check for themselves whether any type of company has filed registration statements and other documents with the SEC via its EDGAR database.)

The SEC delivers a final warning about overseas IEOs, noting that "if the IEO is being offered to a person in the United States, such as through the website of an online trading platform that is based overseas, then the federal securities laws still may apply." However, token purchasers in such overseas offerings may have little legal recourse if fraud sinks their investment.