The United States Securities and Exchange Commission (SEC) has asked investors to be wary of investing in Initial Exchange Offerings (IEOs) as they may not be compliant with securities laws. IEOs that are catering to United States persons must comply with federal securities and corporate law. Exchanges offering these investments may be complicit in wrongdoing themselves, according to the regulator, January 14, 2019.
First Warning on IEOs
Ever since IEOs started gaining traction, the SEC has not really acknowledged its existence – until now. The dawn of IEOs stems from the catastrophe that ensued in the aftermath of the ICO bubble. A lack of information, transparency, and outright shell projects with no objective apart from raising money were all too common.
When IEOs gained traction, it was because the project being listed was thoroughly vetted by the exchange listing it, effectively putting their own reputation on the line when they listed it. For the big players like Binance with something to lose, this was a good strategy. But maybe not for smaller exchanges with no reputation to lose.
Now the United States’ top regulator is calling for investors to not just trust the due diligence conducted by these exchanges as they may be complicit themselves. IEOs could be security offerings, which alone would make it illegal to distribute to United States investors. However, the exchange itself may be classified as a securities exchange under U.S. law, which just makes things messier.
How to Discern Legality
Technically speaking, you need to be well versed with securities law to be able to decipher if a token is a security or not. However, the SEC has laid down some guidelines that investors can follow to make this a tad bit easier.
As per the SEC, the single biggest red flag is when the IEO doesn’t disclose any information regarding the legality of the offering. This would only apply for those that are soliciting U.S persons; the majority of IEOs explicitly state that they aren’t for sale to U.S. persons.
If the exchange is a broker-dealer or securities exchange, they should be registered with the SEC under any circumstance. If they aren’t, the offering has been conducted on an illegal medium.