In a prior alert we highlighted a recent SEC opinion which confirmed that initial coin offerings may in fact be deemed securities. Now FINRA and the SEC alike have both issued recent investor alerts days apart, warning of the dangers posed to investors, highlighting the potential for securities fraud including “pump and dump” and market manipulation schemes. The FINRA alert can be locate here and SEC alert here. According to FINRA’s VP for Investor Education, “ICO’s involve new technologies and products that are highly technical and can be used by con artists as an opportunity to dupe investors”. The FINRA alert provides some advice to interested investors. Those recommendations include, among other items: 1) understanding whether the securities qualify as exempt securities, 2) ensuring the seller is appropriately licensed and registered, and 3) fully understanding your rights, resell rights and “return policies”. Interestingly, they also note that buyers should inquire about cyber security controls to protect against outside intrusions and fraud. Going one step further, companies engaged in ICO’s should also consider cyber and crime insurance (including social engineering coverage) in order to protect their balance sheets. The SEC Alert continues to provide some additional recommendations by warning investors to look out for signs of micro-cap fraud and suspicious representations.

Due to the above perceived risk and potential for increased allegations of fraud (regardless of merit), companies engaged in initial coin offerings should also aggressively pursue D&O insurance. It should be noted however, while D&O is undoubtedly a critical risk mitigation vehicle, securing coverage may prove particularly challenging, especially for companies who’s coin offerings require SEC registration. Companies with offerings that are subject to registration and securities laws will need to place coverage on a public company D&O policy form. Aside from the fact that pool of insurers underwriting mico-cap public companies is already small, the perceived risk of fraud, still emerging regulatory environment and unfamiliar landscape will likely dissuade some underwriters from providing terms. This often results in in fewer proposals, higher premiums, aggressive policy exclusions and terms that may be more difficult to negotiate. Companies interested in securing coverage are best advised to partner with a D&O insurance specialist and qualified securities attorney versed with D&O matters. We have also published a recent article that offers some advice to micro-cap and OTC companies looking to place D&O insurance (which can be found here)