In an investor alert issued on January 14, 2020, staff in the Securities and Exchange Commission’s Office of Investor Education and Advocacy warned investors in initial exchange offerings (IEOs) to “use caution before investing  . . . through online trading platforms.”  According to the SEC staff, “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.”

The alert summarizes guidance issued by the SEC and its staff over the past several years in relation to the following questions:

  • Is the IEO a securities offering?
  • Is the platform a securities exchange?
  • Is the platform a broker-dealer?
  • Is the IEO in compliance with federal securities laws?

The SEC staff states that it “is a red flag if the IEO and its participants, including the online trading platform, do not address or discuss the applicability of the federal securities laws.”  As to whether a US investor can invest in an overseas IEO, the staff also warns that “Any offering purporting to avoid the federal securities laws because it is occurring on an overseas trading platform but otherwise allows persons from the United States to invest is a red flag.” The alert concludes by summarizing a number of the other risks associated with investing in an offshore IEO.

The SEC continues to actively enforce the federal securities laws against issuers and intermediaries offering investments in digital assets, irrespective of how they are purportedly structured. The investor alert serves as a further reminder that offerings of digital assets must be carefully structured to comply with US federal securities laws.