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SEC Warns on Public Companies Making ICOs

JL Law

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On Monday, August 28, 2017, the Securities Exchange Commission (SEC) issued an investor alert about public companies who make Initial Coin Offering (ICO) claims. The Office of Investor Education and Advocacy issued the alert to warn investors about lurking scams from stock companies that claim they will offer ICOs or otherwise offer exposure to them.

SEC Trade Suspensions

Businesses often use the temptation caused by emerging technologies to persuade investors to invest in token or coin offerings for capital funding purposes. Sometimes businesses will use the ICO announcements to manipulate the price of the company's stock. The SEC's authority extends to suspending stock trading if necessary to protect investors. SEC suspension action may occur if:

  • investors lack accurate/adequate information about the company from current SEC filings;
  • SEC questions the accuracy of information about the company's operations and finances;
  • SEC suspects insider trading, market manipulation, or the inability to cover stock transactions.

Recent SEC Suspensions

The SEC recently suspended stock trading for the following companies, based on their claims regarding ICOs or hyping news related to tokens:

  • First Bitcoin Capital Corp
  • CIAO Group
  • Strategic Global
  • Sunshine Capital

An SEC trading suspension is the agency's warning to investors that there is possible fraud relating to such microcap stocks (penny stocks, nanocap stocks). This means the risk involved in any investment in such companies is high and investors should take the high risk into account when making their investment decisions.

Market Manipulation

Fraud perpetrators use market manipulation to profit by spreading distorted stories about a company to influence the price of its stock. The fraud may come in many forms, via spam emails, phony news releases, social media ads, posts on bulletin boards, and even in chat rooms. They may even post stock rumors or other misleading or false information on websites.

Market experts call this type of stock con game "pump and dump". The internet makes it easy for fraud perpetrators to create an active investor buy-in as the company cautions investors to buy stock soon or sell before the price falls. Sometimes the person making these claims is a company insider hoping to take advantage of the manipulated stock price. After the price increases, the insiders dump their stock at the inflated price, stop pumping the stock price, which makes the other investors lose their investment as the stock price drops following the stock dump.

After a Trading Suspension. SEC indicates investors should take these steps before investing in a company following a trading suspension:

  • Research the financial condition and business prospects which you can easily find in SEC filings. Investors can find the free filings available on the SEC website (EDGAR filing system).
  • Non-reporting companies do not file reports with SEC. Investors beware of such stock trades as information from other sources is often unreliable.
  • Due diligence means investors should conduct unique research and not rely on internet blogs, social media, and company websites where information is often inaccurate and unreliable.
  • Be wary of ICO offerings and tokens. Warning signs are statements that stock is SEC compliant without further details and stock trades that funds through ICOs whose descriptions do not make sense.

SEC Warning Signs. The SEC says that investors should pay special attention to the following warning signs for fraud:

  • SEC suspended stock trades for a particular company or the stock.
  • A stock price increases at the same time as any promotional offer.
  • Press releases announce events that never happen and use overstated language.
  • Companies having no assets and/or limited revenue.
  • Companies issue lots of stock with no increase in assets.
  • Companies repeatedly change names, addresses, managers, or type of business.

To learn more, read the full SEC ICO alert which this post summarizes. You can also visit the SEC website for individual investors,  ICOs that rely on Rule 506(c) in order to generally solicit and advertise are required to take reasonable steps to verify that their investors are accredited investors.  In the new era of ICOs where regulation is high, Rule 506(c) is emerging as the most commonly used method to sell ICO related securities.