SECs & IEOs: Putting Together Regulations

Participation in initial exchange offerings (IEO) causes a lot of controversy among investors and questions from regulators. But the US and Malaysian securities commissions agree on one thing: the cryptocurrency pre-sale, even if it is conducted under the guidance of an exchange, should be regulated and obey laws. Therefore, in January 2020, these regulators published documents that should help investors avoid unjustified risks and possible loss of assets.

US SEC and IEO

US SEC on IEO: how to avoid risks

On 14 January, the US Securities and Exchange Commission (SEC) issued a warning on its website for investors participating in initial exchange offerings. The purpose of the publication is to talk about the risks and explain why this type of cryptocurrency pre-sale is no more reliable than the ICO that appeared earlier.

Reasons mentioned by the SEC in their warning:

  1. Crypto projects that have issued security tokens and plan to sell them in the US or to US citizens through IEO should receive permission from the SEC. It will be issued after all the documents about the company and the issued token, as well as the conditions for investors have been studied. Nobody has received such permission yet because they have not provided the necessary information to the regulator.
  2. Most crypto exchanges that support IEO are illegal or do not meet the basic requirements of the SEC. According to federal law, if there are security tokens among IEOs on the platform, then it must register as a stock exchange or alternative trading system. In the second case, you’ll still have to obtain a broker or dealer licence in FINRA and meet the requirements of this regulator.
  3. Mass participation in an IEO does not guarantee an increase in the price of a cryptocurrency. However, platforms claim that they conduct a careful selection of projects that will show high liquidity and yield. The sole purpose of such marketing is to make money from gullible investors.

In general, the SEC believes that IEO is not very different from an ICO: it’s the same token sale, only moved from the websites of project creators to crypto exchanges. The regulator is not concerned with two types of cryptocurrencies, coins and utility tokens, because their purpose is obvious: the former are used as a means of payment, while the latter are needed to access services. In this case, buyers should not count on getting rich. It is another thing if they are offered security tokens, promising yield from ownership.

SC Malaysia and IEO

Malaysia’s SC on IEO: how they should be conducted and how to participate

The Securities Commission Malaysia (SC) did not limit itself to recommendations, but published a guideline to be approved by the legislature in H2 2020. What we are used to thinking of as coins are called digital currency there, and utility tokens are defined as digital tokens. Security tokens have no place in Malaysia’s financial markets at all, that is, crypto projects are not allowed to issue and exchanges are not allowed to sell tokens that give the right to a share or distribution of profit.

To protect citizens from dishonest companies, SC has strict requirements for the latter:

  • A startup should issue a useful currency/token that will solve market problems or optimise services (no memecoins for fun);
  • The minimum paid-up capital of a startup should be 500,000 MYR (~120,200 USD);
  • The issuer can distribute the currency/token either through an IEO on registered crypto exchanges or through investment companies;
  • A crypto exchange must register as an IEO operator;
  • The minimum paid-up capital of the IEO operator should be 5,000,000 MYR (~1,202,000 USD);
  • The IEO operator must verify the issuers, the concept, and functions of the proposed currencies and tokens.

Both institutional and retail investors will be able to participate in IEOs. In order to protect inexperienced investors from themselves, the SC limits their possibilities. A private individual will be able to purchase a digital asset from one issuer for no more than 2000 MYR (~480 USD), and the total amount of investments in any assets should not exceed 20,000 MYR (~4800 USD) per year.

So in that way, according to the SC’s guidelines, only regulated initial exchange offerings will be held. This will protect investors from risks and loss of money.