SEC urges investors to use caution before investing in initial exchange offering (IEO)

The SEC has issued a warning related to trading investing in IEOs. According to the agency,

IEOs may be conducted in violation of the federal securities laws and lack many of the investor protections of registered and exempt securities offerings

In the cases where they constitute the sale of a security, the issuer would be required to register as a security with the SEC along with the exchange as an alternative trading system (ATS) and potentially a broker-dealer. The SEC stresses that these types of investment vehicles can be used for fraudulent purposes given the lack of adequate reporting requirements. If an offshore entity offers to any U.S. based person then they are breaking the law, however, the investor may have limited legal remedy due to the nature of applicable laws in the foreign country.

Why it matters

• The SEC issued a similar statement in 2018 surrounding the issuance of initial coin offerings (ICO) and proceeded to take action against a number of unlawful offerings. IEOs burst onto the scene in 2019, with almost 300 offerings according to our report, and it is likely they did not all comply with U.S. securities laws making them likely targets for future enforcement.
• U.S. based exchanges have avoided IEOs while they proliferated abroad generating substantial revenue for offshore exchanges. A few months ago Coinbase mentioned they were considering an IEO platform, however, the statement by the SEC will likely dissuade them to push that initiative forward.