By
Steve Muchoki
April 25th, 2024
Investors should be aware, that ICOs may serve as a breeding ground for frauds including market manipulation and “pump-and-dump” schemes.
Initial coin offerings or ICOs has drawn a lot of media attention becoming more and more popular among developers, businesses, and individual investors, who use it as a means of crowdfunding.
It’s needless to say, that ICO may provide both fair and lawful investment opportunities, and create situations in which untrustworthy companies manipulate the price of the company’s common stock publicly announcing ICO or ICO-related events. That’s why The SEC’s Office of Investor Education and Advocacy is warning investors about potential frauds involving stock of companies engaged in ICOs. Fraudsters may try to use new and emerging technologies as a kind of bait to convince potential investors to give their money. These frauds often include market manipulation schemes or “pump-and-dump” carried out by publicly traded companies that claim to develop and launch these new technologies.
More specifically, market manipulation may take the form of spreading false and misleading information about a company to affect the stock’s share price. “Pump-and-dump” schemes, in their turn, manipulate a stock’s share price by promoting the company’s stock using false and misleading statements. The example of such schemes can be seen on the Internet where it is common to see messages posted to urge readers to buy or sell a stock quickly before the price goes down.
When required, The SEC may protect investors and the public interest by suspending trading in a stock. According to the SEC investor alert, a trading suspension may occur when there is a lack of current, accurate, or adequate information about the company because of absence of periodic reports, for example. Questions about the accuracy of publicly available information about the company’s current operational and financial status may also serve as a ground for trade suspension. One more possible reason is trading-related questions, including potential market manipulation, ability of clearing and settlement of transactions in the stock.
The SEC recently issued several trading suspensions affecting a number of companies including: First Bitcoin Capital Corp, CIAO Group, Strategic Global, and Sunshine Capital.
The Sec investor alert provides a number of tips which investors should borrow in mind to secure themselves against possible scams. Among others these include:
- Always research a company before buying its stock, especially following a trading suspension.
- Be aware of the risks of trading the stock of “non-reporting” companies, as there may not be current and accurate information for an informed investment decision.
- Do own research taking into consideration that information from online blogs, social networks, and company’s website may be inaccurate and sometimes intentionally misleading.
- Be especially cautious regarding stock promotions, including ICOs, which are related to new technologies.
To recap, in late July, the SEC published a report reminding investors the necessity to register offers and sales of distributed ledger or blockchain technology-based securities and stating that ICOs may be subject to U.S. Securities Laws.
Tim Draper, venture capitalist and a founder of Draper Associates and Draper University, says rational, still light regulation is necessary for the sale of coins to investors. Before the SEC announced its decision, the idea of regulation had been up in the air among other investment groups. Still, he called the decision preemptory and too far-reaching.