According to a warning sent to its Investor Education and Advocacy wing, the U.S. Securities and Exchange Commission (SEC) stated that investors should wary of initial coin offerings (IEOs). In an open statement published on Jan. 14 on the agency’s official website, the SEC warned:
“Be cautious if considering an investment in an IEO. 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. As described below, IEOs may be conducted in violation of the federal securities laws and lack many of the investor protections of registered and exempt securities offerings.”
Did the SEC come too late to the party?
With the rise of Ethereum, 2017 saw an influx of initial coin offerings (ICOs) which attracted the attention of most investors. At the time, plenty of cryptocurrency holders fell for scams and over-promising projects. With no regulatory oversight at the time, investors had no way of reclaiming their lost investments.
In 2019, a different kind of ICOs appeared. IEOs represent a token sale which is hosted by crypto exchanges. IEOs are believed to be safer than ICOs, as they are carefully researched, investigated, and managed by the exchange itself with the goal of raising funds for the project’s team. However, despite the safety measures, cryptocurrency investors leverage the speculation of these projects to gain higher returns.
Binance represented one of the most notable exchanges that held IEOs, with the creation of the Binance Launchpad in early 2019. Cryptocurrencies such as Fetch.Ai, Matic, and BitTorrent token were severely exploited for their high speculation value at the time, resulting in a high number of investors who profited and an equal number who lost their money.
Should IEOs be regulated?
After ICOs gained a notorious reputation following 2017, the SEC started a crackdown on them. The SEC punished several projects under the guise of selling unregistered securities, sanctioning them for their acts. If history should repeat itself, IEOs may face the same fate.
The SEC showed signs today of a possible IEO-related pursuit by stating that some projects may need to be registered at the agency. Furthermore, the SEC also pointed out that exchanges themselves have to receive licenses and different forms of approval in order to continue hosting IEOs.
More interestingly, the SEC believes that IEOs should stay in line with federal securities laws by stating:
“It is a red flag if the IEO and its participants, including the online trading platform, do not address or discuss the applicability of the federal securities laws.”