The SEC urged investors to consider certain risks before investing in initial exchange offerings ("IEOs") of digital assets.
According to the SEC, IEOs are "being touted as an innovation on [initial coin offerings]" because companies are able to offer IEOs directly through online trading platforms, thereby providing immediate trading opportunities for digital assets. The SEC warned that IEOs may (i) violate federal securities laws and (ii) lack investor protections typically associated with registered and exempt securities offerings. Specifically, the SEC encouraged investors to be cognizant of whether:
- an IEO is a securities offering;
- the trading platform is subject to registration as a securities exchange;
- the trading platform is acting as a broker-dealer;
- the IEO is in compliance with federal securities laws; and
- the IEO is offered by an offshore entity.
The SEC stated that it is a "red flag" if the IEO (i) does not address the applicability of federal securities laws or (ii) claims to avoid federal securities laws due to the offer taking place through an overseas trading platform while still allowing individuals in the United States to invest.
Why is the SEC merely warning retail investors about IEOs instead of asking them to contact the SEC or a state securities regulator? Here, for example, is a web article touting IEOs and purporting to distinguish them from initial coin offerings that are securities. The author makes it fairly clear that the exchange through which the IEO is offered is acting as a broker-dealer or underwriter.
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