SEC Swings Into 2020, Warning Investors Of Initial Exchange Offerings

The SEC's Office of Investor Education and Advocacy issued an alert on January 14, 2020, warning investors of initial exchange offerings and the potential for fraud. This follows the 2020 examination priorities the SEC released at the beginning of the year, which touched on virtual currencies and digital assets, and signals continued monitoring of market and technological developments in the digital asset space.

Initial exchange offerings (IEOs) are token sales conducted on online trading platforms, where companies outsource most of the work of a token sale to the platform. While the purpose remains the same as initial coin offerings (ICOs) - to raise capital - platforms perform the work of marketing and selling the tokens, due diligence on the companies requesting an IEO on their platform, and AML and KYC diligence on customers - all for a fee, of course. IEOs gained popularity in 2019 as the new favored form of raising capital in the crypto community following multiple actions by the SEC against companies engaged in ICOs and fraudulent ICOs.

In its alert, the SEC highlighted several ways in which IEOs may clash with federal securities laws, including:

Potential registration requirements under federal securities laws governing offerings an sales of securities. The SEC's previously released framework for analyzing digital assets applies to this analysis. If an IEO involves...