SEC Issues Investor Alert Regarding Initial Exchange Offers (IEOs) of Digital Assets | Practical Law

SEC Issues Investor Alert Regarding Initial Exchange Offers (IEOs) of Digital Assets | Practical Law

The SEC issued an investor alert cautioning investors about dangers of investing in initial exchange offerings (IEOs) of digital assets through online trading platforms.

SEC Issues Investor Alert Regarding Initial Exchange Offers (IEOs) of Digital Assets

Practical Law Legal Update w-023-6684 (Approx. 3 pages)

SEC Issues Investor Alert Regarding Initial Exchange Offers (IEOs) of Digital Assets

by Practical Law Finance
Published on 21 Jan 2020 • USA (National/Federal)
The SEC issued an investor alert cautioning investors about dangers of investing in initial exchange offerings (IEOs) of digital assets through online trading platforms.
On January 14, 2020, the SEC provided an investor alert, which cautioned investors about the dangers of investing in initial exchange offerings (IEOs) of digital assets through online trading platforms. IEOs are similar to initial coin offerings (ICOs) as they both represent an initial offering of digital assets to raise capital. However, IEOs are offered directly by online trading platforms on behalf of companies, usually for a fee, to provide immediate trading opportunities for the digital assets.
Although online trading platforms offering IEOs sometimes refer to themselves as exchanges, they are often not registered with the SEC and typically lack the investor protections of registered or exempt securities offerings.
The alert provides advice to help market participants:
  • Understand the risk involved with investing in IEOs conducted on an offshore trading platform.
  • Recognize whether an IEO is a securities offering.
  • Recognize whether the trading platform on which the IEO is being offered needs to:
    • either register with the SEC as a national securities exchange or operate under an exemption; or
    • register with the SEC and become a member of a self-regulatory organization (SRO) to act as an SEC-registered broker-dealer.
  • Recognize certain red flags that should warrant independent investigation, including where the offering:
    • fails to discuss the applicability of the federal securities laws to the offering;
    • claims to be an "SEC-approved IEO";
    • makes false or misleading statements or exaggerated claims about regulatory approvals and oversight; or
    • is offered to US residents but claims to avoid federal securities laws because the offering occurs on an overseas trading platform.