On August 28, 2017, the US Securities and Exchange Commission (SEC) issued an investor alert, warning about potential scams relating to token offerings, and discussing potential trading suspensions.
In the announcement, the SEC said it suspends the trading in a stock in order to protect investors and the public interest. Specifically, the SEC stated that trading suspension may occur if there is insufficient information about a company, such as if a company fails to file extended or periodic reports, or if there are questions over the accuracy of publicly available information, including press releases and company reports. Also, if there are questions about the trading of stock, such as possible market manipulation, ambiguities about the stock, or the ability to settle and clear transactions in the stock, suspension may occur as well.
According to the alert, "The SEC recently issued several trading suspensions on the common stock of certain issuers who made claims regarding their investments in ICOs or touted coin/token related news. The companies affected by trading suspensions include First Bitcoin Capital Corp., CIAO Group, Strategic Global, and Sunshine Capital."
Additionally, the SEC warns about market manipulation schemes, like the spreading of false or misleading information about a publicly traded business. The SEC also tells consumers to be wary of "pump and dump" schemes wherein, generally on an online forum or message board, business insiders, who have the most to gain, advocate to investors, who shoulder the greatest risk, to buy or sell stocks at a certain price; once the insiders "dump" their stock at perceived inflated value, the price falls and the investors usually suffer a loss.
Offering tips for investors, the SEC urges consumers to research companies before purchasing stock, particularly if a trade suspension for that stock has already taken place. The SEC acknowledges that some "non-reporting" companies are not required to file with the SEC and that investors must be aware of the risks associated with trading stocks in these scenarios. Investors are reminded that information published on blogs or social media sites is not necessarily guaranteed to be accurate, and may be poor resources from which to make an informed decision.
The SEC invites consumers to be "especially cautious" of stock promotions relating to token offerings or and to keep an eye out for warning signs, such as companies that claim to be SEC compliant without divulging how the offering meets that compliance, or any company "that has common stock trading [that] also purports to raise capital through an ICO or take on ICO-related business described in vague or nonsensical terms or using undefined technical or legal jargon."
The SEC also identifies warning signs of possible microcap fraud, including a prior suspension by the SEC, a simultaneous increase in stock or trading volume during the token offering, press releases containing false information, nonexistent business operations, a large issuance of shares without a corresponding increase in company assets, and frequent changes in management, company name, or the type of business.
It is up to investors to safeguard themselves with knowledge before taking the risk; the SEC's alert provides some reasonable steps for consumers and businesses to take in order to understand the evolving landscape between token offerings and stock issuance.