The U.S. Securities and Exchange Commission (SEC) has recently revealed to the public the first warning against initial exchange offerings (IEOs).
According to the notice, SEC says IEOs are similar to initial coin offerings (ICOs). The problem is that a lot of ICOs are under the regulator’s investigation mostly because there is a common thinking that those are all unregistered securities offerings.
As per the announcement, even though IEO providers usually say their sales are different from ICOs, they may still violate federal securities laws. That is why the agency warned investors to “be cautious” if they are considering investing in an IEO.
The agency wrote:
“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.”
The SEC also slammed crypto exchanges saying they “are typically not registered with the SEC” and “may improperly refer to themselves as ‘exchanges.’”
The SEC emphasized that id a platform is registered it does not necessarily mean that it is actually registered with the agency. And it noted that “there is no such thing as an SEC-approved IEO.”
Security Laws above Everything
But, let’s explain what are IEOs. If an IEO calls itself a securities offering, there are few things to watch at. First, IEO becomes subject to registration requirements with the SEC. The company therefore has to disclose certain terms of the offering, the asset, and the business behind it all.
If the IEO is launched by a broker-dealer, the latter has to be registered with the SEC as well as a member of the Financial Industry Regulatory Authority, or FINRA. This will require the broker-dealer to comply with the SEC’s customer protection standards.
Then, if the IEO doesn’t meet any federal securities laws, or labels them as not applicable, this presents an immediate warning for the SEC. Let’s not forget that many IEOs are hosted by offshore entities. However, even then, the IEO is subject to the SEC’s regulations so long the participation is allowed for U.S. investors.
The Commission wrote:
“Noncompliance with the federal securities laws means the IEO and/or trading platform may be operating unlawfully and the investor and market protections and remedies these laws are intended to provide may be absent. You should carefully consider whether the company and the trading platform involved in the IEO has complied with federal securities laws.”
When seeing all that, we can undoubtedly say American securities laws are severe. Maybe even too much. However, the SEC Chair Jay Clayton has defended the standards as assuring that the States are a safe place for someone to invest.
Harsh rules mean many cryptocurrency projects and trading platforms with premises and staff in the U.S. are registered offshore. That also means that when it comes to rules, they could be enforced. Cryptocurrency trading platforms like Bitfinex and BitMEX have been accused of enforcing stated policies barring U.S. traders.