More and more businesses and individuals are using Initial Coin Offerings (ICOs) to raise capital. However, as their popularity with investors grows, so does their popularity with fraudsters. In response to the increasing regularity with which fraudulent ICOsare being reported, the SEC’s Office of Investor Education and Advocacy has issued a warning alerting investors to the possibility an ICOs could well be a potential scam.
The SEC are also alive to the fact that while an ICO may look perfectly legal, their use of coins or tokens could actually be an attempt by the company seeking investment to manipulate the price of their stock. If that is found to be the case, the SEC has said it will suspend trading in the public interest. And they have been quick to act to underline this is not just words by suspending trading on a number of coin related offerings including First Bitcoin Capital Corp., CIAO Group, Strategic Global, and Sunshine Capital.
Their statement goes on to outline the circumstances that could force them to consider suspension and, in our opinion, this list provides an invaluable checklist investors can use to protect themselves from a potential fraud. The SEC warns investors to be concerned if:
§ There is a lack of “current, accurate, or adequate information about the company”, e.g. if the company hasn’t filed any periodic reports over a significant period of time.
§ Any questions have been raised as to the accuracy of publicly available information such as press releases or publicly available reports on their operations and/or finances.
§ Any questions have been raised about the way the company trades or if there are concerns about insider trading or market manipulation.
§ There have been previous trading suspensions
While all of this is great advice, there are also further signs an ICO could be fraudulent. Fraudsters thrive on market confidence so they will often spread false rumours about their company.
If you see a sudden spike in unsubstantiated press releases, email claims and posts on social media, online bulletin boards or chat rooms that could be a sign those behind the rumours might be trying to manipulate the market. It is also very important to remember that these messages can be positive or negative depending on the way the fraudster wants to affect the price.
These schemes are often referred to as ‘pump and dump’ schemes. False statements are pumped out via the internet designed to inflate the value of the stock in question, all peppered with repeated encouragement to invest quickly before the price drops. What is really happening is the fraudster behind the messages is pumping up the price so they can dump their own stock at a profit. Once they dump their stock the price will crash and the other investors, all of whom have been drawn in by their false claims, lose their money.
So how can you protect yourself?
Well, we’ve already looked at a few pointers but as a quick and easy-to-use summary we would always suggest you:
§ Always do your research. Look at the company’s finances, structure, personnel and prospects and always make sure they have not been hit with trading suspensions in the past.
§ If the company is a ‘non-reporting company’ (i.e. it is not required to file reports with the SEC), you need to be aware the information you’ll need to research the company probably won’t be available and this should increase the risk of investing.
§ Treat any unsubstantiated information (as opposed to information released by an officially recognised regulatory body) you find online with suspicion unless it can be corroborated by an official source.
§ Make sure that if the company claims their offering has been sanctioned by a recognised regulatory body, they have also explained why the offering has been passed as compliant.
§ Be wary if the supporting legal Ts and Cs are impenetrable, jargon heavy and unforgivingly complicated; that depth of ‘legalese’ is probably being employed as misdirection.
§ Look out for the likely signs of ‘pump and dump’ fraud; these include a past trading suspension, volatile and inexplicable price fluctuations, press releases covering events that never happened, no recorded assets belonging to the company and frequent name and personnel changes.
We are a law firm that specialises in helping clients successfully resolve digital frauds. If you have found yourself a victim of a fraudulent ICO or any other type of digital fraud, call us today on 020 7792 5649 or email us at firstname.lastname@example.org.
We will help.