America's financial regulator has warned investors to steer clear of shady alt-coin investment schemes.
The SEC says that, following a rash of suspended initial coin offerings, people should take a closer look at the money-raising campaigns before parting with their money.
Initial coin offerings are like business IPOs: when a cryptocurrency startup wants to raise money to kick start its operations, it sells off virtual tokens to investors who hope the value of the coins increases.
According to the US securities body, unscrupulous traders have been using these money-raising events to fuel pump-and-dump scams, bringing in investors to temporarily inflate the price of a currency only to immediately sell off their shares before the price collapses.
"Developers, businesses, and individuals increasingly are using ICOs – also called coin or token launches or sales – to raise capital," the SEC said in its alert this week.
"While these activities may provide fair and lawful investment opportunities, there may be situations in which companies are publicly announcing ICO or coin/token-related events to affect the price of the company's common stock."
The warning comes as popular cryptocurrencies such as Bitcoin and Etherium are seeing their valuations soar to new highs. The SEC notes that with more people trying to speculate on digital currencies, the likelihood of scam operations soars.
Because of this, the commission is warning investors to do their homework before investing in ICOs or backing companies that want to raise funds through an ICO.
Check 'em out
In particular, the SEC warns that any legitimate company touting its ICO as "SEC-compliant" should be able to show a detailed description of just how its offering would comply with regulations. Those who can't show their work should be avoided.
Additionally, the commission said, investors should be wary of any company pushing an ICO that already has publicly traded stock (a possible indicator of a pump and dump) or anyone who relies on jargon and "vague or nonsensical terms" to describe their ICO plans.
"Some companies are not required to file reports with the SEC. These are known as 'non-reporting' companies," the SEC notes.
"Investors should be aware of the risks of trading the stock of such companies, as there may not be current and accurate information that would allow investors to make an informed investment decision." ®