The U.S. Securities and Exchange Commission (SEC) has issued an alert warning investors about the dangers of initial exchange offerings (IEOs).

The alert, published Tuesday by the regulator’s Office of Investor Education and Advocacy, called on investors to exercise caution before investing in an IEO through online trading platforms.

IEOs are similar to ICOs however unlike ICOs, IEOs are “offered directly by online trading platforms on behalf of companies – usually for a fee – to provide immediate trading opportunities for the digital assets.”

The regulatory body also cautioned investors that a lot of these online trading platforms are not regulated and should not be patronized.

“These online trading platforms, which are typically not registered with the SEC and which may improperly refer to themselves as ‘exchanges,’ may also claim to perform due diligence or other quality assessments of the IEOs. Be cautious if considering an investment in an IEO.”

Investors were also warned that “Many online trading platforms may give the misimpression to investors that they are registered or meet the regulatory requirements for a national securities exchange or ATS. When they lack the investor protections that a national securities exchange or an ATS provides to investors.”

SEC: IEOs may lack investor protections

The SEC further cautioned investors that some offerings may involve the offer and sale of securities, meaning the IEO may be subject to registration requirements that apply to offerings under the federal securities laws.

“IEOs may be conducted in violation of the federal securities laws and lack many of the investor protections of registered and exempt securities offerings,” the commission added, noting that some IEOs may not be operating under the law.

With regards to overseas IEOs, the SEC pointed out that if it is offered to U.S. investors, then federal securities laws may still apply.

The commission also highlighted potential red flags associated with overseas IEOs.

“Any offering purporting to avoid the federal securities laws because it is occurring on an overseas trading platform but otherwise allows persons from the United States to invest is a red flag,” it cautioned.

The alert also noted that “It is a red flag if the IEO and its participants, including the online trading platform, do not address or discuss the applicability of the federal securities laws.”

The commission also stressed that there is “no such thing as an SEC-approved IEO” and urged investors to do their due diligence with regards to any claims made by such offerings.