​Want to make money on an initial coin offering? Beware the risks, says SEC

New technology can lead to new scams, the regulator has warned.
Written by Liam Tung, Contributing Writer

Anyone looking to invest in initial coin offerings needs to do their homework first, the SEC has warned. (Image: Getty Images/iStockphoto)

Investors need to watch out for fraudsters when investing in initial coin offerings (ICO), the US Securities and Exchange Commission (SEC) has warned.

Virtual coins or tokens are created and shared using distributed ledger or blockchain technology, and these can be sold in an ICO.

Developers, businesses, and individuals increasingly are using ICOs -- also called coin or token launches or sales -- to raise capital, and the SEC said while this may provide fair and lawful investment opportunities, "there may be situations in which companies are publicly announcing ICO or coin/token related events to affect the price of the company's common stock."

It warned: "Fraudsters often try to use the lure of new and emerging technologies to convince potential victims to invest their money in scams."

The SEC recently issued several trading suspensions on the common stock of certain issuers who made claims regarding their investments in ICOs or touted coin/token related news.

"A trading suspension is one warning sign of possible microcap fraud (microcap stocks, some of which are penny stocks and/or nanocap stocks, tend to be low priced and trade in low volumes). If current, reliable information about a company and its stock is not available, investors should consider seriously the risk of making an investment in the company's stock," the SEC said.

It also warned investors to watch out for companies that claim their ICO is "SEC compliant" without explaining how it complies with securities laws; and firms trying to raise capital where the business is "described in vague or nonsensical terms or using undefined technical or legal jargon".

In other words, investors need to do proper research before backing a new project and be aware that information blogs, social networks, and company websites could be intentionally misleading.


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