The US Financial Industry Regulatory Authority (FINRA) published an update on its website on August 16th with a series of tips for investors on how to avoid fraudulent Initial Coin Offerings (ICOs). The aim of the publication, according to FINRA, is to generate an alert about the implications of investing in digital assets, such as tokens or cryptocurrencies, and to make clear the differences between this type of investment and those made in more traditional assets, such as stocks and bonds.
The agency says that investments in Initial Coin Offerings or ICOs can represent a challenge, due to the difficulties in verifying the information they offer. The dangers inherent in market volatility, speculative risk and the potential for fraud are also mentioned. However, it also recognizes the potential of these instruments to develop legitimate innovations. Thus, in addition to explaining what ICOs are and how they issue new cryptocurrencies, the publication provides advice to investors to help them make decisions.
FINRA’s publication has an intertitle entitled “7 things you should know now about ICOs” which speaks at first of the lack of ICOs regulation and the lack of legal protection for investors in such business models, which exposes them to fraudulent schemes and deceptive tactics, with little chance of recovering their money.
FINRA states that some ICOs are using Simple Agreements for Future Tokens (SAFTs) to offer new crypto tokens to the public
“SAFTs are investment contracts that appear to be modeled after SAFE (Simple Agreement for Future Equity), contracts that arose with value-based crowdfunding. Be aware that investing in a SAFT contract does not mean that the offer is “secure” or that it complies with applicable federal and state laws,” stated FINRA.
It is clarified that in a SAFT the issuer announces that the token will begin as a security token, subject to federal securities laws, but will then be transformed into a utility token, outside of these laws. FINRA notes that, regardless of what a company says, there is no guarantee.
On the other hand, FOMO (fear of missing out), meaning the fear of losing something or being left out of something, is a form of anxiety that has proliferated with the technological boom. It arises among social network addicts and also among ICO traders and investors. FINRA states that studies are confirming that many decisions are made by FOMO, regardless of market fundamentals, project development forecasts and the nature of the tokens.