Initial Coin Offerings: Know the risks before you buy

WASHINGTON — The Financial Industry Regulatory Authority (FINRA) today issued an Investor Alert warning investors about the potential risks of participating in initial coin offerings, commonly referred to as ICOs.

An ICO involves the creation and distribution of virtual coins or tokens by a company to raise capital. ICOs differ from initial public offerings (IPOs) of stocks. ICOs typically confer no ownership rights in the company and, unlike bonds, ICOs do not involve investors lending money to the issuer.

Depending on the circumstances of each ICO, the virtual coins or tokens offered and sold to investors may be securities. If so, the offer and sale of these tokens are subject to the federal securities laws, according to a recent Investor Bulletin issued by the Securities and Exchange Commission (SEC).

“Investing in an ICO may seem like an exciting way to be a part of the virtual currency and blockchain startup markets, but buyers should use caution when considering these complex investments,” said Gerri Walsh, FINRA’s Senior Vice President for Investor Education. “ICOs involve new technologies and products that are highly technical and can be used by con artists as an opportunity to dupe investors.”

Before investing in an ICO, buyers should consider the following:

• Is the ICO a securities offering? If it is, then the offer and sale of the coins or tokens must be registered with the SEC or meet an exemption from registration. Investors should confirm if a company has registered an ICO with the SEC’s Edgar system. If it is not, it is likely only available to accredited investors, and most retail investors do not meet this standard.
• Are the individuals selling the investment registered financial professionals? Be sure to check the professional background of the individuals involved in the offering using BrokerCheck. If the tokens offered in an ICO are securities, then any investment professional offering to sell the tokens must maintain certain licenses and registrations under state and federal securities laws and FINRA rules.
• What rights and benefits come with your ICO purchase? The rights and benefits of ICO tokens will vary depending on the offering. Thoroughly read and understand the terms and conditions of an ICO, as well as any white paper and the business plans offered by the company issuing tokens.
• How can you get your money back? Information provided to investors about ICOs should clearly state how you can get your money back. Ask the company if you can cash in tokens for a refund, whether you are permitted to resell your tokens in a secondary market and what, if any, restrictions apply to any resale.
• What does the company do and what is it offering? To date, most ICOs are being offered by startup businesses that have not rolled out a final product or platform to the market. This means that the information available to you at the time of an ICO may be incomplete, subject to change and difficult to verify.
• Are there protections in place to guard against hacking and other cybersecurity threats? Be sure to inquire about steps these companies have taken to protect their platforms and products from possible protocol breakdowns, hacking, malware and fraud.

If investors have concerns about ICOs, or suspect a scam related to ICOs or virtual currencies, they should contact the SEC, file a complaint using FINRA’s online Complaint Center or send a tip to FINRA's Office of the Whistleblower.

Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck or by calling (800) 289-9999. In 2016, members of the public used this free service to conduct 111 million reviews of broker or firm records. Investors can also call FINRA's Securities Helpline for Seniors at (844) 57-HELPS for assistance with concerns or questions about their brokerage accounts and investments.

FINRA is dedicated to investor protection and market integrity. It regulates one critical part of the securities industry – brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.