The Financial Industry Regulatory Authority is warning investors about the potential risk of participating in initial coin offerings, or ICOs, which differ significantly from initial public offerings involving stocks, could lose money, and are being used by con artists to dupe investors.

As the alert explains, ICOs involve new technologies and products that are highly technical and complex, and investors can lose some or all of the money they invest in an ICO.

Some startup companies are using ICOs, or token sales, to raise capital.

In an ICO, a company creates a new virtual coin or token that they offer for sale and disseminate to purchasers using blockchain technology, also called distributed ledger technology, the alert says.

“Unlike stocks, ICOs typically confer no ownership rights in the company; and unlike bonds, ICOs do not involve investors lending money to the issuer,” the alert states. “Instead, ICOs involve new technologies and products that are highly technical and complex, and investors can lose some or all of the money they invest in an ICO.”

Gerri Walsh, FINRA’s senior vice president for investor education, noted in a statement that “investing in an ICO may seem like an exciting way to be a part of the virtual currency and blockchain startup markets, but buyers should use caution when considering these complex investments.”

ICOs, Walsh said, “involve new technologies and products that are highly technical and can be used by con artists as an opportunity to dupe investors.”

Before getting involved in an ICO, FINRA urged investors to determine if the ICO is a securities offering. “This is important,” the alert states, as the SEC noted in a July investor bulletin on ICOs, “if the offer and sale of tokens or coins in an ICO constitutes a securities offering, then the federal securities laws apply.”

Other important factors to consider, according to the alert:

  • Are the individuals selling the investment registered financial professionals? Be sure to check the professional background of the individuals involved in the offering using BrokerCheck.
  • What rights and benefits come with your ICO purchase? The rights and benefits of ICO tokens will vary depending on the offering.
  • How can you get your money back? Information provided to investors about ICOs should clearly state how you can get your money back. Ask the company if you can cash in tokens for a refund, whether you are permitted to resell your tokens in a secondary market and what, if any, restrictions apply to any resale.
  • What does the company do and what is it offering? To date, most ICOs are being offered by startup businesses that have not rolled out a final product or platform to the market. This means that the information available to you at the time of an ICO may be incomplete, subject to change and difficult to verify.
  • Are there protections in place to guard against hacking and other cybersecurity threats? Be sure to inquire about steps these companies have taken to protect their platforms and products from possible protocol breakdowns, hacking, malware and fraud.

— Check out International Regulatory Shift Could Tame Cryptocurrency Market on ThinkAdvisor.