“When thinking about cryptocurrencies and other blockchain offerings as fund assets, are differences in their features important? How would these funds fit into the existing regulatory scheme?”

Dalia Bass, Director of the Division of Investment Management from the United States Securities and Exchange Commission,  posed these questions while speaking at the ICI Securities Law Developments Conference in Washington, D.C.

Bass then continued:

“What regulatory structure or structures apply to the market for the underlying instrument?” And then reassured the attendees: “We will be discussing these questions with you as we work through these filings.”

It is only natural for these questions to arise, seeing as how digital currencies are being used more and more in conventional situations now but with no conventional trail for these institutions to keep track of those investments or the risks associated with them.

That being said, the SEC has been looking into such instances actively as increased activity has been noticed by the agency pertaining to blockchain and its usage. Back in July 2017, the SEC also issued an investor alert informing potential users about the risks that come with using initial coin offerings (ICOs).

Inquiries are also being made, wherever necessary, into ICOs that involve U.S. investors.

Diamonds, Real Estate, and Digital Currency

On September 29, 2017, a businessman and two companies were charged by SEC with defrauding investors in a pair of ICOs, supposedly backed by investments in diamonds and real estate.

As per the SEC’s complaint, investors were allegedly informed that they could expect returns from the companies’ operations, when neither had any real operations. The businessman and his company had also allegedly misrepresented the amount raised by investors.

The SEC’s complaint sought permanent injunctions and disgorgement plus interest and penalties. 

The SEC is vigilantly sorting out filings

While the SEC may have questions, it seems that it is also seeking answers to them. Regular inquiries into any complaints logged seem to be an ongoing process, and the learning curve with digital currencies seems to be sharpening their knowledge base by each day.

The investor alert that had been shared by SEC, among other guidelines on dealing in ICOs and digital currencies, only goes on to prove that considerable vigilance should be put into practice while making financial transactions with a party that you don’t know or have never conducted business with.

The potential warning signs for ICOs

  • “Guaranteed” high investment returns:  There is no such thing. If something seems too good to be true, then it most probably is.
  • Unsolicited offers: The person sounds too eager? Making sales pitches where they are not required? This tells you how it could be part of a fraudulent scheme. Stay away from it.
  • Pressure to buy RIGHT NOW: False urgency always is a warning sign. Do your due diligence before making a decision.
  • Unlicensed sellers: You can check licensed sellers on Investor.gov.
  • No net worth or income requirements. Security offerings need to be registered with the SEC as per law, unless an exemption from registration is applied. Many registration exemptions require that investors are accredited investors; while others have limits on investment. Be suspicious of private (i.e., unregistered) investment opportunities that do not ask about your net worth or income or whether investment limits apply. 

As with anything else, before you make any investment, go through all the information that you are given and ask as many questions as you deem necessary. Verify the authenticity of the information that you are being given about the investment and keep asking questions until you are satisfied.

As long as one practices the art of vigilance and conducts their due diligence, they will be able to stay away from these ICO horror stories.