Capital generation events can come in many different forms. For those involved in the world of blockchain, the terms ICO, STO, and DSO have most likely become common terminology. Another variant of these type of events is known as the IEO or ‘Initial Exchange Offering’.
Since first capturing investors’ attentions in early 2019, IEOs have gone on to largely replace the ICO, as they are commonly viewed as a safer means of practice. This sense of security is often due to the belief that projects are legitimate, since they are being hosted on an exchange, and that they represent better investment opportunities.
They, however, do not come free of danger. The Securities and Exchange Commission (SEC) has recently released a notice/warning to those that have taken, or are thinking of taking, part in an IEO.
In their notice, the SEC clearly iterates that ‘there is no such thing as an SEC-approved IEO’. Even if not making this claim, the SEC warns that many IEOs may be selling securities disguised at utility tokens (intentionally or not).
Whats the Difference?
When IEOs were first rising in popularity, we were fortunate to have guest contributor, Liza Aizupiete (Managing Director at Fintelum), share her thoughts. In her contribution, Aizupiete touches on the differences between what constitutes an ICO versus an IEO.
Are They Worth Your Time?
Our very own Antoine Tardif, CEO of Securities.io, also took the time to pen his thoughts on the recent performance of IEOs. His findings led him to the conclusion that, “what is currently more important than the actual project being listed, is where the project is listed. We anticipate that once regulated security tokens increase in popularity, that IEOs may be an enticing option to list these security tokens on regulated exchanges. This would be similar to how stock exchanges currently operate.”
While the SEC address a variety of points in their notice, there are two statements in particular that shed light on to their stance. The following are excerpts from their notice, demonstrating this.
Is the IEO a securities offering?
“There are important issues investors should be aware of before investing in an IEO. As in the case of ICOs, depending on the facts and circumstances of the offering, the offering may involve the offer and sale of securities. This means the IEO may be subject to registration requirements that apply to offerings under the federal securities laws. Among other things, registration means that the company offering the digital asset has to provide important disclosures about itself, its business, the digital asset offered, and the terms of the offering to investors.”
Is the platform a securities exchange?
“In addition, if the IEO involves securities, the online trading platform on which the IEO is being offered may need to register with the SEC separately as a national securities exchange or operate pursuant to an exemption, such as an alternative trading system (ATS). An ATS must be a registered broker-dealer and comply with applicable requirements in order to legally operate in the United States.
The federal laws and regulations governing registered national securities exchanges and ATSs are designed to protect investors and prevent fraudulent and manipulative trading practices. Many online trading platforms may give the misimpression to investors that they are registered or meet the regulatory requirements for a national securities exchange or ATS, and therefore may lack the investor protections that a national securities exchange or an ATS provide to investors.”
The Securities and Exchange Commission is a U.S. based regulatory body, tasked with creating and enforcing laws which pertain to assets deemed securities. The goal of this is to foster the growth of a fair and transparent market for all participants.
Chairman, Jay Clayton, currently oversees operations within the SEC.
In Other News
Beyond simply reiterating their stance on what constitutes a security, and subsequent warnings on potentially violating regulations, the SEC has been hard at work. One example of their other endeavours is a recent proposal put forth, which would see various amendments made to the definition of an ‘accredited investor’.