Jeff Dorman,a former analyst at Merrill Lynch and Lehman, took to twitter recently to “to clear up a lot of misconceptions (on IEOs) that I’ve been hearing from others”. He begins by reiterating why IEOs are illegal at least in the U.S. saying that “the tokens are clearly securities, & unregulated exchanges are acting as broker/dealers.”
It must be understood that in an ICO, a project’s development team is in charge of token minting and distribution. However, in an IEO, crypto platforms become the third-party dealers that oversee the launching of projects on their platforms.
Consequently, all an IEO buyer is required to do is to open an account on the crypto platform selling the desired IEO tokens then purchase some of the crypto platform’s tokens to fund their wallets. Those tokens are then are used to buy IEO token’s which are later listed on the trading platform at the end of the IEO.
IEO Tokens Making Huge Returns
The crypto platform earns a listing fee from the token issuer plus a percentage of the sold tokens. The crypto platform also, takes up the marketing of the token as well facilitation and due diligence services on the new coin. It is estimated that IEOs have netted over $175 million in March to April of 2019.
To illustrate, Binance Launchpad, the IEO ecosystem visionary, facilitated a $7.2 million sale of the BitTorrent IEO, using the Binance BNB token. Binance has similarly done other four IEOs and promises to one each month.
The IEO wave has got the crypto venture capitalists in a frenzy and with hindsight the growth of IEO has partly induced the latest rally of the crypto currencies. Consequently, the exchange’s tokens are on a growth spurt and are up about an average of almost 200 percent YTD.
There is no Regulation
The U.S. Securities and Exchange Commission (SEC) has however, been watching and is cracking the whip. The SEC’s Senior Advisor on Digital Assets Valerie Szczepanik, also known as the SEC’s “Crypto-Czar” has voiced the SEC’s grave concern about IEOs saying:
“Most obviously, cryptocurrency trading platforms seeking to list these tokens for a listing fee or bring buyers to the table for issuers are probably engaging in broker-dealer activity . . . If they are not registered, they will find themselves in trouble in the U.S., if they have a U.S. issuer or U.S. buyers, if they are operating on the U.S. market.”
Broker-dealer activity is regulated by amongst others, the Securities Exchange Act of 1934. This law prohibits any person from effecting a securities transaction unless they are registered as brokers or dealers. Besides, FINRA has regulations and rules that pertain to the licensing and the regulation of this trade designation. Failure to comply can result to severe and in some cases criminal ramifications.
Jeff Dorman cautions that the tactics used by IEOS are not new but rather alterations of older tactics. He worries however that the IEO buyers might be buying due to the FOMO the crypto exchanges generate without understanding the risks and the mechanics of the IEO.