Yesterday, the U.S. Securities and Exchange Commission (SEC) issued an “Investor Alert” about “potential scams involving stock of companies claiming to be related to, or asserting they are engaging in, Initial Coin Offerings (or ICOs).” Given the turbulent and uneasy relationship between the U.S. government and crypto-based startups, this investor warning sent a brief chill of fear throughout the ICO-investing community.
Was this the start of an SEC crackdown on ICOs? Hardly. If anything, it’s more surprising that the SEC hasn’t issued an ICO-related Investor Alert until now. The SEC’s warning isn’t really about ICOs — a perfectly legal funding mechanism under current U.S. law — but rather about con artists seeking to take advantage of uneducated and unwary investors who have gotten caught up in the recent ICO mania.
As the SEC release stated:
“Fraudsters often try to use the lure of new and emerging technologies to convince potential victims to invest their money in scams. These frauds include ‘pump-and-dump’ and market manipulation schemes involving publicly traded companies that claim to provide exposure to these new technologies.”
Much like past SEC warnings on cryptocurrencies, the aim of this alert bulletin is to warn would-be investors about the dangers of ICO-based scams. Specifically, the SEC is concerned about a growth in token-based “pump-and-dump” schemes. These schemes are nothing new — they’re essentially a variation on the IPO-based fraud that plagued OTC stock exchanges in the 1980s — and it’s not surprising that the SEC is being especially vigilant here.
As the SEC warning explained, these pump-and-dump schemes “involve the effort to manipulate a stock’s share price or trading volume by touting the company’s stock through false and misleading statements to the marketplace. Pump-and-dump schemes often occur on the Internet where it is common to see messages posted that urge readers to buy a stock quickly or to sell before the price goes down, or a promoter will call using the same sort of pitch. In reality, the author of the messages may be a company insider or paid promoter who stands to gain by selling their shares after the stock price is ‘pumped’ up by the buying frenzy they create. Once these fraudsters ‘dump’ their shares for a profit and stop hyping the stock, the price typically falls, and investors lose their money.”
If you’ve seen The Wolf of Wall Street, you get the idea.
While some in the ICO community tend to rankle at any suggestion of government intrusion, this SEC alert is not exactly a cause for alarm. The SEC already has full authority to intervene in ICOs and other crowdfunding, and there was nothing in this bulletin to suggest that the agency’s current hands-off policy is likely to change. But it was a clear warning to would-be scammers that the SEC is watching the ICO space.
The Investor Alert also included several “Tips for Investors,” encouraging basic research and due diligence on any potential investment.