Tips for Investors: How to Protect Yourselves Against Possible Fraud Schemes

Today the Securities and Exchange Commission (SEC) rolled out an investor alert which advises investors to be careful of trading in the stock of public companies claiming to be related to or asserting they are engaging in, Initial Coin Offerings (or ICOs).

This is the latest twist in the ICO saga where the earlier alerts were more focused on addressing the token sale offerings made by startups or non-public companies.

With this increased focus from the regulators, we may very well see much more detailed oversight of these potential offerings and maturing of the market to ensure that quality projects with high-quality development teams are funded using this new investment mechanism.

It remains to be seen though as to how the future steps are planned by the regulators to ensure that all these offerings continue to abide by the laws of the land and investor community does not suffer.

Tips for investors

The SEC has detailed the below-mentioned tips for investors which are meant to educate the public against possible fraud schemes and help protect investor interest. The advice has been reproduced below from the bulletin for readers ease.

  • Always research a company before buying its stock, especially following a trading suspension. Consider the company’s finances, organization and business prospects. This type of information often is included in filings that a company makes with the SEC, which is available for free and can be found in the Commission’s EDGAR filing system.
  • Some companies are not required to file reports with the SEC. These are known as “non-reporting” companies. 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.
  • Investors should also do their own research and be aware that information from online blogs, social networking sites and even a company’s own website may be inaccurate and potentially intentionally misleading.
  • Be especially cautious regarding stock promotions, including related to new technologies such as ICOs.  Look out for these warning signs of possible ICO-related fraud:
  1. A company that has common stock trading claims that its ICO is “SEC-compliant” without explaining how the offering complies with the securities laws; or
  2. A company that has common stock trading 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.
  • Look out for these warning signs of possible microcap fraud:

  1. SEC suspended public trading of the security or other securities promoted by the same promoter;
  2. Increase in stock price or trading volume happening at the same time as the promotional activity;
  3. Press releases or promotional activity announcing events that ultimately do not happen (e.g., multiple announcements of preliminary deals or agreements; announcements of deals with unnamed partners; announcements using hyperbolic language);
  4. Company has no real business operations (few assets, or minimal gross revenues);
  5. Company issues a lot of shares without a corresponding increase in the company’s assets; and
  6. Frequent changes in company name, management, or type of business.

Clampdown of publicly traded penny stocks

In the past month the SEC has ordered stock trading freezes of the publicly traded companies namely First Bitcoin Capital Corp., CIAO Group, Strategic Global and Sunshine Capital.

All of these firms have seen changing hands multiple times and have publicly stated plans for potential cryptocurrency offerings and ICOs before the SEC took note and ordered the stock trading freeze.

Regulatory risk

With the explosive growth in the ICOs, regulators around the world have started taking note and issued advisories to better educate investors about the potential securities laws violations.

Regulators in US, Canada and Singapore have issued specific guidelines in this regards to help investors better understand what constitutes as securities and what doesn't.

The regulators are specifically wary of pump and dump schemes whereby certain coin offerings may be used specifically to inflate their price post offering so that vested interests could then dump them at a profit.


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