On August 28, the SEC Office of Investor Education and Advocacy (OIEA) released an Investor Bulletin about the risks associated with investing in companies that claim to be related to, or assert that they are engaged in, Initial Coin Offerings (ICOs). ICOs are also known as coin or token launches, and sales are often used to raise capital. However, the OIEA warns investors that while some companies employ ICOs for lawful opportunities, the agency is cracking down on companies who use emerging technologies like ICOs for fraudulent purposes, such as announcing ICOs in order to affect the price of their common stock. The OIEA issued guidance, including (but not limited to) the following, to help investors spot potential fraud:
- Investors should consider past trading suspensions as warning signs of possible microcap fraud when considering whether to invest, especially if there is a lack of current, reliable information about the company and its stock offerings.
- Investors should be cautious about “pump-and-dump” schemes where companies manipulate the price of a stock to urge investors to buy quickly through false and misleading statements, and then unload shares of those stocks at artificially inflated prices, causing investors to lose money.
- Investors should understand the risks of investing with companies that are not required to file reports with the SEC (“non-reporting companies”);
- Investors should be very cautious of stock promotions offered by companies that do not provide details on whether the ICOs are compliant with securities law.
The bulletin also includes links to additional investor resources, including an Investor Bulletin on ICOs.