What is Initial Exchange Offering (IEO) Fraud?

Initial Exchange Offering (IEO) fraud refers to deceptive practices or scams related to IEOs, which are a fundraising method used by new cryptocurrency projects. Unlike Initial Coin Offerings (ICOs) where investors purchase tokens directly from the project’s website, in IEOs, the fundraising campaign is conducted on a cryptocurrency exchange platform. The exchange takes on the role of intermediary between project developers and investors.

IEO fraud can manifest in several ways:

• Fake Projects – just like with Initial Coin Offering scams, there can be projects that have no real motive of developing a product or service. They create an elaborate website, whitepaper, and marketing materials to look legit and then disappear once they’ve raised money.
• Collusion with Exchanges – since the exchange is a critical player in an IEO, there’s a possibility for corrupt exchanges to work with fraudulent projects. The exchange might conduct little to no due diligence and list any project for a fee, misleading investors about the project’s legitimacy.
• Pump and Dump Schemes – project developers or insiders might buy large quantities of the token during the IEO and then artificially inflate the price (pump) by spreading positive rumors or other means. Once the price is sufficiently high, they sell off (dump) their stake, crashing the price and leaving other investors with worthless tokens.
• Fake Exchange Websites – there have been instances where scammers set up fake exchange websites, purporting to host an IEO. Unsuspecting investors might send their funds to these platforms thinking they are investing in a legitimate IEO.
• Manipulated Metrics – projects or exchanges might mislead investors with inflated metrics like user count, transaction volume, or token demand to make the project seem more successful than it truly is.
• Hidden Token Allocations – the project team might not be transparent about how tokens are allocated. For example, they might secretly reserve a significant portion for themselves, which can be dumped later, diluting the value for other holders.
• Security Breaches – if an exchange has poor security, it can be a target for hackers. Investors’ funds might be stolen during the IEO process.

To avoid falling victim to IEO fraud, investors should conduct thorough research, be skeptical of too-good-to-be-true promises, and only use reputable exchanges. If you are a victim of an IEO scam, continue reading to learn about your rights under the SEC Whistleblower Program. You may be eligible to receive protection, rewards, and other compensation for your information.

If you believe that an Initial Exchange Offering (IEO) is engaging in fraud or violating U.S. securities laws, you can report it to the U.S. Securities and Exchange Commission (SEC) under their whistleblower program. Here are some things to note about the program:

1. Prepare Your Information – before submitting a tip, gather all pertinent information and documentation that supports your claim. This might include:
   • Specific details about the IEO, including names, dates, and locations.
   • Any promotional materials, whitepapers, or website links.
   • Documentation or evidence of the alleged fraudulent activity.
   • Any personal records or communications related to the IEO.
2. Online Submission – go to the SEC’s official website and look for the Office of the Whistleblower. There, you will find the “Submit a Tip” option. You will be guided through the process of submitting your tip electronically using the SEC’s TCR (Tips, Complaints, and Referrals) system.However, given the complex nature of whistleblowing, we strongly encourage you to first consult with an SEC whistleblower attorney. A missed deadline or improperly filled out form may result in the SEC dismissing your submission.
3. Mail Submission – if you choose to submit the TCR on your own, you can submit your tip online or by mailing a paper Form TCR. This form is available on the SEC’s whistleblower website. Fill it out, attach any relevant documentation, and mail it to:U.S. Securities and Exchange Commission
   Office of the Whistleblower
   100 F Street, NE
   Mail Stop 5553
   Washington, DC 20549
4. Anonymous Reporting – if you wish to remain anonymous, you must have an attorney represent you in connection with your submission. While the SEC will make efforts to protect your identity, anonymity is only guaranteed if you submit through an attorney.
5. Potential Rewards: If the SEC takes legal action as a result of your information and monetary sanctions exceed $1 million, you may be eligible for a reward. This reward can range from 10% to 30% of the money collected.
6. Protection Against Retaliation – the Dodd-Frank Act protects whistleblowers from retaliation by employers for reporting possible wrongdoing in accordance with the SEC whistleblower provisions. If you experience retaliation, you can report it to the SEC.
7. Stay Updated: After you’ve submitted a tip, you can periodically check the status of your submission using the unique TCR submission number you’ll receive.

Always consult with a legal professional, especially one experienced in securities law or whistleblower cases, before making a submission to the SEC. They can provide guidance on the process and potentially assist you in maximizing the impact of your submission.

The U.S. Securities and Exchange Commission (SEC) has been active in monitoring the landscape of the cryptocurrency market. New fundraising methods, like Initial Exchange Offerings (IEOs), represent a new type of potential fraud that the SEC is actively on the lookout for.

While IEOs are a newer method compared to Initial Coin Offerings (ICOs), the SEC’s primary concern remains consistent: whether these token offerings qualify as securities under U.S. law and if they adhere to registration and disclosure requirements.

One notable example that underscores the SEC’s active involvement in this domain, albeit related to ICOs, is:

• Bitcoiin2Gen and Steven Seagal – in 2020, the SEC announced settled charges against actor Steven Seagal for failing to disclose payments he received for promoting an investment in an ICO conducted by Bitcoiin2Gen (B2G). Though this pertains to an ICO rather than an IEO, it serves as an illustrative reminder of the SEC’s commitment to regulating endorsements and promotions of these offerings. Celebrities or others who promote tokens may find themselves in legal hot water if they don’t transparently reveal the nature, scope, and amount of compensation they’ve received.

Given the dynamic nature of the cryptocurrency space, the SEC continues to offer guidance, undertake enforcement actions, and release public statements to clarify their position on digital assets, including IEOs. Investors and market participants are advised to stay informed and proceed with caution, understanding that the regulatory environment is continuously evolving.

For individuals navigating the complex world of cryptocurrency offerings, endorsements, and the regulatory landscape, seeking professional legal advice is crucial. Engaging with an experienced attorney ensures that you are well-informed and protected in such a rapidly evolving domain.

If you’re in search of deep expertise, consider reaching out to Kohn, Kohn & Colapinto LLP. With a legacy of major legal victories and the inclusion of a former acting chair and commissioner of the SEC as of counsel at the firm, our profound knowledge of securities law positions us uniquely to guide you through the whistleblower process. Your best defense and advantage in the crypto space is a top legal team; don’t hesitate to enlist our support.