- The American Securities and Exchange Commission (SEC) has issued a warning against Initial Exchange Offerings (IEOs).
- According to the SEC, IEOs may be classified as securities and therefore offer insufficient investor protection.
The US Securities and Exchange Commission (SEC) has issued an official notice in which it warns crypto investors against investing in Initial Exchange Offerings (IEOs). In the letter, the SEC explains that, contrary to many assertions, Initial Exchange Offerings are basically no different from Initial Coin Offerings (ICOs). According to the SEC, Initial Exchange Offerings can also be classified as securities and have the same risks as Initial Coin Offerings.
SEC warns of fraud and lack of regulation
After the Initial Coin Offering (ICO) boom ended in 2018, Binance invented the Initial Exchange Offering (IEO), a similar fundraising event managed by an exchange. In contrast to an ICO, where the project team conducts the fundraising itself, the IEO uses the fundraising platform of a well-known exchange.
The original idea for the IEO came from Binance, who wanted to minimize the risk of the investor by pre-selecting the project and eliminating the need for on-chain transactions. Binance’s idea was followed in 2019 by numerous other crypto exchanges such as Bittrex, Huobi, KuCoin and OKex.
As the SEC now notes, (these) crypto exchanges, although the SEC did not name any names, are usually not registered. According to the SEC this is a significant regulatory violation, as IEOs lack many of the investor protection provisions for registered and exempted securities offerings. In particular, the SEC warns in its letter against false promises, also by those exchanges that have an interest in offering the sale via a fee model:
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.
Furthermore, the SEC states that IEOs may be in violation of U.S. federal securities laws. It is true that not every IEO is a securities offering. There are a number of factors that investors must consider before investing in an IEO. However, Chairman Jay Clayton also said last year that virtually every ICO he has seen is a securities offering.
If IEOs are classified as securities, the crypto exchange must register separately with the SEC as a national exchange. Failure to comply with the federal securities laws means that the IEO and the trading platform may be “operating illegally and the investor protection and remedies provided by those laws may not be available”.
As the SEC also stated, many IEOs are conducted by offshore companies. Even if this is the case, the IEO is subject to SEC rules as long as US investors are allowed to participate. Any IEO that claims to be exempt from federal securities laws because it is outside the US is another red flag.
It is important to note that Binance, for example, has already blocked its Launchpad platform for US clients and 35 other countries, as have other exchanges.