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.
The U.S. Securities and Exchange Commission (SEC) is actively protecting investors from unregistered or fraudulent ICOs, which is why they have provided this information about the “Three Rs” of ICOs: Risks, Rewards, and Responsibilities.
Here are five things that you need to know about ICOs
- ICOs can be security offerings – ICOs, based on specific facts, may be securities offerings, and fall under the SEC’s jurisdiction of enforcing federal securities laws.
- They 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 risk – 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.
Here are some examples of enforcement actions and trading suspensions.
What investors need to know
So, what do you need to know about ICOs before investing? Start with some basic research on Investor.gov and 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? Make sure you visit investor.gov for more resources before you invest. Arm yourself with knowledge from this Investor Bulletin.
- 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.