SEC warns Investors about Cryptocurrency Scams

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The number of people investing in digital currency, otherwise known as cryptocurrency has been on a steady rise. The digital currency whose main advantage according to its users is the fact that it is not limited by the confines of geographical, administrative or political boundaries. There are over 3000 types of digital currencies available in the market at the moment. Some have made people make money, while others have been the cause for loss of money. This is because some have been associated with pyramid schemes and the dark web.

BitThe U.S Securities and Exchange Commission on Monday issued a precautionary statement directed to investors interested in the digital currency market. The SEC warned of a possible Initial Coin Offering (ICO) scams and “pump and dump” schemes by public companies.

The precautionary statement issued by the SEC is meant to be a way of making investors aware of the risks that are associated with investing in these public companies that have been proven to be promoting ICOs and knowingly “pump” the prices of their submissions with “new and emerging technologies.” According to the SEC, the con artists may at times lure unsuspecting investors into investing a lot of money in the scams with the promise of offering solutions using new and emerging technologies. The scams include “pump and dump” and schemes meant to manipulate the market.

The statement by the SEC said, “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.”

What is an ICO?

An ICO, also referred to as an Initial Public Coin Offering (IPCO), is an unregulated means through which funds are raised to support a new cryptocurrency venture. The ICOs are often utilized by startups to evade the detailed and regulated process of raising capital as laid down by banks and venture capitalists (VCs). A typical ICO campaign involves selling a percentage of a cryptocurrency to early financiers of the venture in exchange of money (legal tender) or payment using other cryptocurrencies (mostly Bitcoins).

SECGenerally, when a startup cryptocurrency firm wants to raise money through an ICO, they usually make up plans stating the aims of the projects, the need(s) that would be fulfilled should the project come to completion, the funds required to make the venture successful, how much of the virtual tokens would the founders of the venture keep to themselves, the type of money accepted, and the length of time during which the ICO campaign would run.

During the time the ICO campaign is on, supporter and financiers of the firm’s initiative are allowed to buy some of the crytocoins with virtual currency. The coins are known as tokens and are like shares sold to investors in a typical Initial Public Offering (IPO) transaction. An ICO is deemed unsuccessful if the funds raised do not meet the minimum monetary needs of the firms, such funds are then returned to the supporters. Otherwise, the scheme is initiated.

The early investors in ICOs are motivated into buying the cryptocoins with the hope that the venture would be successful after launching hence translate to a higher value of their cryptocoins. Some are often motivated by success stories of ventures such as the Ethereum which was announced in 2014. Ethereum’s ICO raised $18 million in Bitcoins and went live in 2015. By 2016, its market capitalization was over $1 billion!

SEC Warning

The latest warning by the SEC is a concentrated effort to bring sanity to the rapidly increasing digital money market. Last month, the SEC indicated that for the first time the securities laws may be applied to the sale of digital currencies. Recently, the SEC has put on hold all trading activities of four OTC-based companies over questions about their ICOs. The companies include: CIAO Group, First Bitcoin Capital Corp., Sunshine Capital, and Strategic Global.

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The SEC had pointed out that it was concerned over the accuracy of the information about the value of assets presented by these companies before announcing their trading suspensions. One of the general partners at Haystack and an early investor in the crypto space, Semil Shah said that the memo sent by the SEC should be a warning to con artists who are trying to manipulate unknowing retail investors by promoting access to “new technologies” such as the blockchain.

Shah said, “Right now, awareness of Bitcoin, the blockchain, and the liquidity around ICOs can be marketed to unsophisticated investors who may have heard of these things and want exposure. The term ‘ICO’ in general has become more recognized but also more fraught with skepticism from sophisticated investors. Here, the SEC is watching, as well.” Have you invested in any ICO for a digital currency? Should the digital currency space be regulated by the SEC? What would be the effect of attempts to regulate the cryptocurrencies market?

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