S.E.C. Warns Initial Exchange Offerings (IEOs) May Be Illegal

Following the United States Securities and Exchange Commission’s (SEC) crackdown on Initial Coin Offerings (ICOs), the commission has now turned its attention to Initial Exchange Offerings (IEOs).

Yesterday, the SEC issued a warning saying:

“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.”

 Over the past year, the SEC has been taking action against many companies that conducted ICO’s that the commission classified as unregistered securities offerings. For example, only last week we reported that the SEC wants more than $16m from ICOBox and its founder Nikolay Evdokimov (read more), and two weeks ago we revealed that the commission is demanding Telegram disclose how it spent the $1.7bn raised in its ICO (read more).

SEC turns its attention to IEOs

However, the SEC is now turning its attention to Initial Exchange Offerings (IEOs) – which really gained popularity at the start of 2019. Several projects on Binance’s launchpad listed IEOs, including BitTorrent, while Fetch.Ai (FET) achieved $6m within the first minute of its IEO on 25th February.

An IEO sees a cryptocurrency exchange handle the launch of a token on behalf of a startup, in return for listing fees and a percentage of the tokens sold. Supporters argue that IEOs are more reputable because major crypto exchanges can usually perform more extensive due diligence checks on projects, and can then provide better security and infrastructure, minimising risk.

But, because the tokens sold in IEOs are securities and the unregulated exchanges are performing the role of brokers, the SEC considers them illegal, so US residents are barred from participating in them.

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