SEC urges caution with Initial Exchange Offerings

The US Securities and Exchange Commission (SEC) has issued a public notice urging investors to be cautious with Initial Exchange Offerings (IEOs).

IEOs are a form of crowdfunding that became popular throughout 2019, with leading cryptocurrency exchanges such as Binance launching platforms through which new start-up projects could raise capital.

IEOs are a variant of the infamous Initial Coin Offerings (ICO) which gained notoriety during the cryptocurrency boom of 2017/18 due to their use in numerous scams.

IEOs differ from ICOs because the start-up is thoroughly vetted by the hosting exchange before the fundraising process is launched. The exchange then provides assistance to help complete the campaign.

ICOs on the other hand rely on the developers to ensure smart contracts are correctly established to ensure the offering goes to plan.

As such, IEOs offer greater security for users, enhanced transparency, and a fairer system overall. However, they do not come without problems.

SEC issues IEO warning

The SEC has now published a public notice to investors urging them to be cautious when dealing with Initial Exchange Offerings.

“IEOs are being touted as an innovation on ICOs because they are offered directly by online trading platforms on behalf of companies—usually for a fee—to provide immediate trading opportunities for the digital assets,” it writes.

“These online trading platforms, which are typically not registered with the SEC and which may improperly refer to themselves as ‘exchanges’, may also claim to perform due diligence or other quality assessments of the IEOs.”

The US regulator continues to state that new technologies – particularly those associated with digital asset fundraising – can be “improperly used to entice investors with the false promise of high returns”.

The SEC also notes several red flags to watch out for, such as if the IEO and participants (including the online trading platform) do not address the “applicability of the federal securities laws”.

An additional sign to be wary of is any offering purporting to avoid federal securities laws because it is conducted on an overseas trading platform but which still allows US investors to take part.

Interested in reading more IEO-related stories? Discover more about the differences between an Initial Exchange Offering and an Initial Coin Offering.