As this short video explains, the “initial exchange offering,” or IEO, is the latest innovation in the offer and sale of cryptocurrencies. By partnering with a crypto exchange to aid in marketing and listing efforts, issuers engaging in an IEO hope to obtain better visibility and liquidity for their products. But like the ICOs they seek to replace, IEOs raise a host of potential issues under the US federal securities laws.

Many of the cryptocurrencies offered for sale in an IEO are likely to constitute securities under the SEC’s DAO Report analysis and more recent framework guidance. Intermediaries transacting in digital securities on behalf of issuers or investors are also subject to a wide variety of SEC regulations and may be required to register with the SEC in one or more capacities. To date, however, no cryptocurrency exchange has been registered with the Securities and Exchange Commission (SEC) as an exchange. Registration as a broker-dealer may also be required, depending on the exchange’s business model. The SEC is not hesitant to bring enforcement actions against parties that violate SEC regulations, including the broker-dealer registration rules. Many states have also begun to step up enforcement action against unregistered crypto exchanges.

Rescission is one of the many remedies available to a purchaser of a security offered in violation of law, and rescission is also available for any security purchased from an unregistered exchange or broker-dealer. Under this remedy, the issuer of the security must refund the full purchase price and, in many states, also pay imputed interest on the amount between the time of sale and the time of refund. As with any offering of a security, participants in IEOs should give careful thought to compliance with US state and federal securities laws before beginning any marketing efforts.