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FINRA’s ICO warning: Investing in SAFT contract does not ensure the offering’s regulatory compliance

The Financial Industry Regulatory Authority (FINRA) has issued a warning against investments in digital assets, such as initial coin offering (ICO) tokens and cryptocurrencies.

In an online post dated August 16, the regulator noted that the digital asset market continues “to display high levels of volatility, involve speculative risk and the potential for fraud.”

“While ICOs, cryptocurrencies and the technologies that power them may hold great potential for legitimate innovations in capital raising and financial markets, it can be a challenge for investors to verify information about these products to make informed decisions,” it said.

FINRA further listed “seven lessons” related to digital asset investments. These are:

  • ICOs offer little investor protection
  • ICO fraud is real
  • Online platforms that facilitate trading in ICO tokens are not registered exchanges
  • Investors are losing millions to ICO theft
  • Receipt of future tokens is not a given in an ICO
  • Simple Agreements for Future Tokens or "SAFTs" don't make ICOs safe
  • FOMO or “fear of missing out” can inflate ICO valuations

The regulator explained that SAFTs are those investment contracts that appear to have been modeled after SAFE (Simple Agreement for Future Equity) contracts. It pointed out that in a SAFT, the issuer usually advertises that the token being offered would start out as a "security token" subject to the federal securities laws but then transform over time into a "utility token" that operates outside of the federal securities laws.

“Know that investing in a SAFT contract does not mean the offering is "safe" or compliant with applicable federal and state laws,” FINRA emphasized. “No matter what a company says about the ability of a token to change characteristics from a security to a non-security, there is no guarantee that the SEC or the courts would agree with a company's assessment.”

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