Companies and individuals are increasingly considering initial coin offerings (ICOs) as a way to raise capital or participate in investment opportunities. While these digital assets and the technology behind them may present a new and efficient means for carrying out financial transactions, they also bring increased risk of fraud and manipulation because the markets for these assets are less regulated than traditional capital markets. Here are the three “Rs” of ICOs: Risks, Rewards and Responsibilities.
Five Things You Need To Know About Initial Coin Offerings (ICOs)
ICOs can be securities offerings.
ICOs, based on specific facts, may be securities offerings, and fall under the SEC’s jurisdiction of enforcing federal securities laws.
ICOs may need to be registered
ICOs that are securities most likely need to be registered with the SEC or fall under an exemption to registration.
Tokens sold in ICOs can be called many things
ICOs, or more specifically tokens, can be called a variety of names, but merely calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security.
ICOs may pose substantial risks
While some ICOs may be attempts at honest investment opportunities, many may be frauds, separating you from your hard-earned money with promises of guaranteed returns and future fortunes. They may also present substantial risks for loss or manipulation, including through hacking, with little recourse for victims after-the-fact.
Ask questions before investing
If you choose to invest in these products, please ask questions and demand clear answers.
What investors need to know about ICOs
So, what do you need to know about ICOs before investing? Take note of the following:
Products can be sold and traded internationally.
Recognize that these products are often sold on markets that span national borders and that significant trading may occur on systems and platforms outside the United States. Your invested funds may quickly travel overseas without your knowledge. Although the SEC actively enforces securities laws, risks can be amplified, including the risk that market regulators may not be able to effectively pursue bad actors or recover funds.
Research your financial professional
Understand the opportunity that is being presented, and do your homework on the individual who is doing the presenting. Is the offering legal and is the person offering this product licensed to do so?
If an investment sounds too good to be true, be cautious
As with any other type of potential investment, if a promoter guarantees returns, if an opportunity sounds too good to be true, or if you are pressured to act quickly, please exercise extreme caution and be aware of the risk that your investment may be lost.
Understand how the product is traded
Many platforms for trading digital assets refer to themselves as “exchanges,” which can give the misimpression to investors that they are regulated or meet the regulatory standards of a national securities exchange.
What market professionals need to know about ICOs
The Chairman of the U.S. Securities and Exchange Commission (SEC), Jay Clayton, has stated that tokens and offerings that feature and market the potential for profits based on the entrepreneurial or managerial efforts of others contain the hallmarks of a security under U.S. law.
Use caution before promoting offers and selling coins
Market participants should use caution when promoting or touting the offer and sale of coins without first determining whether the securities laws apply to those actions, SEC says. Similarly, those who operate systems and platforms that effect or facilitate transactions in these products should be aware that they may be operating unregistered exchanges or broker-dealers that are in violation of the Securities Exchange Act of 1934.
The SEC protects Investors, and expects you to
Gatekeepers and others, including securities lawyers, accountants and consultants, should be guided by the principal motivation for the SEC’s registration, offering process and disclosure requirements: Investor protection and, in particular, the protection of Main Street investors.
SEC Report of Investigation on Coin or Token Offerings.
Market professionals, including securities lawyers, accountants and consultants, are encouraged to read closely the Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 The DAO which the SEC released in 2017, concluding that a particular token was a security, SEC says..
Know when an exchange needs to be registered.
If a platform offers trading of digital assets that are securities and operates as an “exchange,” as defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange or be exempt from registration.
Source(s): Nigeria Circle News, SEC