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SEC Warns Against Pump and Dump ICO Scams

by Paul-Martin Foss

The US Securities and Exchange Commission (SEC) recently warned consumers about the risk of pump and dump schemes surrounding initial coin offerings (ICOs). A pump and dump scheme is one in which individuals, often senior insiders within a small or recently-formed public company, will attempt to use various methods to drum up interest in a company’s stock in order to raise the share price. That will often include false or misleading press releases touting new products that don’t exist, sales that haven’t happened, or shadowy new business ventures. Once share prices rise, the insiders sell their shares and run, leaving ordinary investors to hold the bag as the stock’s price eventually falls. Very often the same bad actors are involved in multiple pump and dump schemes over a period of several years.

ICOs are a method by which some cryptocurrency companies raise funds, selling digital tokens to investors who wish to have a stake in the company’s project. ICOs haven’t been heavily regulated, so they offer new cryptocurrency companies a way to raise money without the rigorous process of having to go through banks or pitch their projects to venture capitalists. Because of market fears that the SEC might try to regulate ICOs, many companies involved in ICOs have banned American investors from participating.

The SEC recently announced that some ICOs should be considered to be securities, not digital currencies, and it also announced that it has banned the trading of four companies due to questions surrounding their ICOs. Evidently, there was suspicion that those companies may have just been operated as pump and dump schemes.

With a market as hot as digital currencies and with millions or even billions of dollars to be made in the field, it is not surprising that it would attract some bad actors hoping to fleece unsuspecting investors. This underscores that investors in cryptocurrency ventures should do their due diligence before making any investment decision.

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