Mar 13, 2018 | Shareholder & Investor Protection
Investors Should Only Use an Online Digital Trading Platform or Entity Registered with the SEC
Recently, the SEC published a public statement about online trading platforms where investors can buy and sell digital assets, including coins and tokens offered and sold in Initial Coin Offerings (“ICOs”). Often, the online trading platforms claim to give investors the ability to quickly buy and sell digital assets, and many platforms bring buyers and sellers together in one place and offer investors access to automated systems that display priced orders, execute trades, and provide transaction data.
Further, a number of these platforms provide a mechanism for trading assets that meet the definition of a “security” under the federal securities laws. If a platform, according to the SEC, offers trading of digital assets that are securities and operates as an “exchange,” as defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange or be exempt from registration. The federal regulatory framework governing registered national securities exchanges and exempt markets is designed to protect investors and prevent against fraudulent and manipulative trading practices.
Investors Should Use a Platform or Entity Registered with the SEC When Trading Digital Assets
To get the protections offered by the federal securities laws and SEC oversight when trading digital assets that are securities, investors should use a platform or entity registered with the SEC, such as a national securities exchange, alternative trading system (“ATS”), or broker-dealer.
Investors Should NOT ASSUME Online Trading Platforms Are SEC-Registered and Regulated Marketplaces
Many online trading platforms appear to investors as SEC-registered and regulated marketplaces when, in fact, they are not. Many trading platforms refer to themselves as “exchanges,” which can give the misimpression to investors that they are regulated or meet the regulatory standards of a national securities exchange. Although some of these platforms claim to use strict standards to pick only high-quality digital assets to trade, the SEC does not review these standards or the digital assets that the platforms select, and the so-called standards should not be equated to the listing standards of national securities exchanges. The SEC also does not review the trading protocols used by these platforms, which determine how orders interact and execute, and access to a platform’s trading services may not be the same for all users. The SEC cautions investors NOT TO ASSUME that the trading protocols meet the standards of an SEC-registered national securities exchange. Finally, many of these platforms give the impression that they perform exchange-like functions by offering order books with updated bid and ask pricing and data about executions on the system, but there is no reason to believe that such information has the same integrity as that provided by national securities exchanges.
Questions the SEC Reminds Investors to Ask Before Trading Digital Assets Via an Online Trading Platform
Is the online trading platform registered as a national securities exchange, a securities exchange that has registered with the SEC under Section 6 of the Securities Exchange Act of 1934? Please click here for a list of active national securities exchanges registered with the SEC under Section 6(a) of the Exchange Act.
Is the online trading platform operating as an alternative trading system, and if it is, has the ATS registered as a broker-dealer which has filed a Form ATS with the SEC? Please click here for the SEC’s list of active alternative trading systems.
Have you check for information in FINRA’s BrokerCheck ® about any individuals or firms operating the online trading platform?
How does the platform select digital assets for trading? Who can trade on the platform?
What are the trading protocols? How are prices set on the platform?
Are platform users treated equally? What are the platform’s fees?
How does the platform safeguard users’ trading and personally identifying information?
What are the platform’s protections against cybersecurity threats, such as hacking or intrusions?
What other services does the platform provide? Is the platform registered with the SEC for these services?
Does the platform hold users’ assets? If so, how are these assets safeguarded?
Online Trading Platforms and Alternative Trading Systems – Other Considerations
A platform that trades securities and operates as an “exchange,” as defined by the federal securities laws, must register as a national securities exchange or operate under an exemption from registration, such as the exemption provided for ATSs under SEC Regulation ATS. An SEC-registered national securities exchange must, among other things, have rules designed to prevent fraudulent and manipulative acts and practices. Additionally, as a self-regulatory organization (“SRO”), an SEC-registered national securities exchange must have rules and procedures governing the discipline of its members and persons associated with its members and enforce compliance by its members and persons associated with its members with the federal securities laws and the rules of the exchange. Further, a national securities exchange must itself comply with the federal securities laws and must file its rules with the SEC.
An entity seeking to operate as an ATS is also subject to regulatory requirements, including registering with the SEC as a broker-dealer and becoming a member of an SRO. Registration as a broker-dealer subjects the ATS to a host of regulatory requirements, such as the requirement to have reasonable policies and procedures to prevent the misuse of material non-public information, books and records requirements, and financial responsibility rules, including, as applicable, requirements concerning the safeguarding and custody of customer funds and securities. The overlay of SRO membership imposes further regulatory requirements and oversight. An ATS must comply with the federal securities laws and its SRO’s rules, and file a Form ATS with the SEC.
Some online trading platforms may not meet the definition of an exchange under the federal securities laws, but directly or indirectly offer trading or other services related to digital assets that are securities. For example, some platforms offer digital wallet services (to hold or store digital assets) or transact in digital assets that are securities. These and other services offered by platforms may trigger other registration requirements under the federal securities laws, including broker-dealer, transfer agent, or clearing agency registration, among other things. In addition, a platform that offers digital assets that are securities may be participating in the unregistered offer and sale of securities if those securities are not registered or exempt from registration.
See also Regulation of Exchanges and Alternative Trading Systems.
Source: SEC.gov
Image: Pixabay, Gerd Altmann (Geralt), CC0 1.0 Universal
Cryptocurrency & Initial Coin Offering Investors
If you are a cryptocurrency or Initial Coin Offering investor who has suffered investment losses and have questions or concerns about your potential legal rights or claims, please complete the form above on the right or e-mail [email protected]. Alternatively, please contact John Kehoe, Esq., [email protected], (215) 792-6676, Ext. 801.
Feb 15, 2018 | Shareholder & Investor Protection
SEC’s Office of Investor Education and Advocacy Issues Investor Alert Warning of the Risks of Using Credit Cards to Buy Investments or Fund an Investment Account
On February 14, 2018, the SEC issued an investor alert to inform investors about the risks associated with investing by credit card. The SEC’s alert advised that investors should understand that most licensed and registered investment firms do not allow their customers to use credit cards to buy investments or to fund an investment account, and investors should work only with a licensed or registered investment professional or firm and not attempt to use a credit card to fund investments.
The SEC’s Investor Alert provided the following information regarding the risks associated with using a credit card for an investment:
Fraud. Unregistered and unlicensed sellers often pressure investors to use credit cards for investments that are actually fraudulent scams. Most registered investment firms do not allow their customers to use credit cards to purchase investments – so be skeptical if you are asked to use a credit card to invest. Investors should research the background of any investment professional or firm before handing over your money, and use the free search tool on Investor.gov to make sure the firm and professional is licensed.
High Interest Rates. High interest rates may significantly reduce the return you receive on any investment or may even cause you to lose more money than you invested. For example, if your credit card charges a 15% interest rate and your investment provides a 10% return, you will owe more money than you made on your investment if you do not pay off your credit card balance before any interest accrues. The SEC advises investors to consider paying off credit card debt before making an investment decision.
Credit Risk. If you cannot make your credit card’s minimum payments, you may incur additional credit card fees and risk damage to your credit score.
Transaction Fees. Credit card companies generally charge a processing fee (often ranging from 1.5% to 3%) for each credit card transaction. If you use a credit card to buy an investment, you generally have to pay this processing fee with each investment purchase which would have a major impact on the investment’s return.
Issues with Withdrawals. Credit card investment scammers often use delay tactics when you attempt to withdraw your money from the fraudulent investment. These scammers will often hold up your withdrawal request from an investment account until it is too late for you to dispute the charge(s) with your credit card company. The Fair Credit Billing Act (FCBA) provides consumer protections if you are charged for goods and services you didn’t accept or that weren’t delivered as agreed, but you must send a letter disputing the charges that reaches the creditor within 60 days after the first bill with the error was mailed to you.
Credit Card Abuse. Be watchful for unauthorized charges on your credit card statements. Even if you signed a form purportedly waiving your right to dispute any credit card charges, report all unauthorized charges to your credit card company immediately.
Third-Party Payment Processors. If you make an investment using your credit card through a third-party wallet service or payment processor, you may have limited recovery options because these entities may be unregulated or operating unlawfully.
Margin Accounts. A margin account is an investment account offered by some investment firms which allows you to borrow cash from the investment firm to buy securities, using the account as collateral. While both involve borrowing money to buy investments, using a margin account is not the same as using a credit card to buy securities. For additional information on how margin accounts work and their related rules and regulations, please review the SEC’s Investor Bulletin: Understanding Margin Accounts.
Source: Investor.gov
Feb 6, 2018 | Blog
The Telemarketing Sales Rule: For-Profit Telemarketers Must Be Truthful
According to a recent Federal Trade Commission blog posting (“Telemarketing Sales Rule requires clarity on charity”):
To make sure that telemarketers are truthful about why they are calling, so consumers can make an informed decision about whether to engage with a telemarketer and contribute to a charity, the 2001USA Patriot Act expanded the Federal Trade Commission’s Telemarketing Sales Rule to cover calls made to solicit charitable contributions.
At the direction of Congress, the FTC modified the Telemarketing Sales Rule to:
1) Apply to interstate calls made by for-profit telemarketers to solicit charitable contributions;
2) Require for-profit telemarketers to promptly disclose the name of the group making the request and that the purpose of the call is to ask for a donation; and
3) Prohibit for-profit telemarketers from making false or misleading statements to induce a person to contribute.
For-Profit Charitable Callers Must Follow the Telemarketing Sales Rule
Another FTC blog posting (“For-profit charitable callers must follow the rules”) advised that “The Do Not Call Registry” is designed to stop unwanted sales calls; however, one exception to the Do Not Call Registry allows for-profit fundraisers to call individuals on behalf of charities even if one’s telephone number is listed on the Do Not Call Registry. When these charitable fundraisers call someone, however, they must still follow the Telemarketing Sales Rule.
Notable provisions of the Telemarketing Sales Rule Which For-Profit Fundraisers Must Follow:
Telemarketers must promptly tell consumers the charity on whose behalf they’re calling and truthfully disclose if the purpose of the call is to ask for a donation.
Telemarketers cannot make misleading statements to persuade people to donate, including misrepresentations about the charitable purpose, how much money goes to the charity, whether donations are tax deductible, how the money will be used, or the telemarketer’s connection to the charity.
Telemarketers cannot use robocalls or prerecorded messages to reach consumers unless the person is a current member of the charity or has donated to the charity in the past. And even if the consumer has donated to that charity before, robocalls from a telemarketer must promptly offer a way to opt out of future calls.
If the consumer tells the telemarketer they don’t want to be called by that charity again, the telemarketer must maintain a Do Not Call list for that charity and stop calling that person on behalf of that charity.
Telemarketers cannot call before 8 A.M. or after 9 P.M.
Telemarketers must keep certain records, like scripts and promotional materials, for two years.
Have You Received Unsolicited or Unwanted Telemarketing Calls, Autodial Calls, Robocalls or Text Messages?
If you have received unwanted, unsolicited or harassing telemarketing calls, autodial calls, robocalls or text messages and would like to speak privately with an attorney to learn more about your potential legal rights, please complete the form to the right or contact Michael Yarnoff, Esq., (215) 792-6676, Ext. 804, [email protected]; John Kehoe, Esq., (215) 792-6676, Ext. 801, [email protected]; or send an e-mail to [email protected].
Jan 17, 2018 | Shareholder & Investor Protection
SEC Chairman and Commissioners Issue Statement Regarding NASAA’s Reminder to Investors to Use Caution When Approaching Cryptocurrencies, ICO’s & Other Cryptocurrency-Related Investment Products
On January 4, 2018, SEC ChairmanJay Clayton and Commissioners Kara M. Stein and Michael S. Piwowar issued a statement “commend[ing] the North American Securities Administrators Association . . . on their release highlighting important issues and concerns related to cryptocurrencies, initial coin offerings (ICOs) and other cryptocurrency-related investment products.”
The statement of the SEC Chairman and Commissioners also stated that
NASAA’s release is a timely and thoughtful reminder to Main Street investors to exercise caution. The release recognizes that cryptocurrencies, while touted as replacements for traditional currencies, lack many important characteristics of traditional currencies, including sovereign backing and responsibility, and now are being promoted more as investment opportunities than efficient mediums for exchange.
The NASAA release also reminds investors that when they are offered and sold securities they are entitled to the benefits of state and federal securities laws, and that sellers and other market participants must follow these laws. Unfortunately, it is clear that many promoters of ICOs and others participating in the cryptocurrency-related investment markets are not following these laws. The SEC and state securities regulators are pursuing violations, but . . . again caution . . . that, if [one] lose[s] money, there is a substantial risk that [regulatory] efforts will not result in a recovery of [one’s] investment. [Emphasis added]
The SEC’s statement also encouraged investors to read NASAA’s release and, importantly, to note the common “red flags” of investment fraud that NASAA’s release mentions, in addition to reviewing the following SEC investor-related bulletins, alerts, reports, and statements:
Image: Pixabay, Gerd Altmann (geralt), CC0 Creative Commons License
NASAA’s Reminder to Cryptocurrency & Initial Coin Offering Investors
NASAA’s investor reminder (“NASAA Reminds Investors to Approach Cryptocurrencies, Initial Coin Offerings and Other Cryptocurrency-Related Investment Products with Caution”) advises “Main Street” investors use caution when investing in cryptocurrencies. NASAA’s cryptocurrency investor reminder, among other things, stated:
Cryptocurrencies are a medium of exchange that are created and stored electronically in the blockchain, a distributed public database that keeps a permanent record of digital transactions. Current common cryptocurrencies include Bitcoin, Ethereum and Litecoin. Unlike traditional currency, these alternatives have no physical form and typically are not backed by tangible assets. They are not insured or controlled by a central bank or other governmental authority, cannot always be exchanged for other commodities, and are subject to little or no regulation. [Emphasis added]
A NASAA survey of state and provincial securities regulators shows 94 percent believe there is a “high risk of fraud” involving cryptocurrencies. Regulators also were unanimous in their view that more regulation is needed for cryptocurrency to provide greater investor protection. [Emphasis added]
NASAA’s investor reminder also quoted NASAA President and Director of the Alabama Securities Commission, Joseph P. Borg, who stated that “Cryptocurrencies and investments tied to them are high-risk products with an unproven track record and high price volatility. Combined with a high risk of fraud, investing in cryptocurrencies is not for the faint of heart.”
Initial Coin Offerings & Cryptocurrency-Related Investments: “Emerging Investor Threats”
NASAA’s reminder also stated that last month ICO’s and cryptocurrency-related investment products were identified as emerging investor threats for 2018. According to NASAA:
Unlike an Initial Public Offering (IPO) when a company sells stocks in order to raise capital, an ICO sells “tokens” in order to fund a project, usually related to the blockchain. The token likely has no value at the time of purchase. Some tokens constitute, or may be exchangeable for a new cryptocurrency to be launched by the project, while others entitle investors to a discount, or early rights to a product or service proposed to be offered by the project. [Emphasis added]
NASAA’s “Get in the Know About ICOs” Video, Common Cryptocurrency Concerns & Common Red Flags of Fraud
For investors, NASAA’s reminder identified common concerns to consider before investing in cryptocurrency, as well as reminded investors to look for the common “red flags” of investment fraud, such as “guaranteed” high investment returns, investment claims which “sound too good to be true,” “pressure to buy immediately,” and unlicensed individuals or investment firms.
Lastly, NASAA provided an animated video, “Get in the Know About ICOs,” to assist investors understand the risks associated with cryptocurrency and Initial Coin Offerings.
Image: Pixabay, Gerd Altmann (geralt), CC0 Creative Commons License
Please click Kehoe Law Firm, P.C. for more information about Initial Coin Offerings and cryptocurrency, as well as other securities- and consumer-related class action matters.
Jan 7, 2018 | Archive
IRS Whistleblower Program – More than $499 Million in Whistleblower Monetary Awards
According to the recently released “IRS Whistleblower Program Fiscal Year 2017 Annual Report to Congress”:
- Since 2007, information submitted by whistleblowers has assisted the IRS in collecting $3.6 billion in revenue.
- The IRS has approved more than $499 million in monetary awards to whistleblowers.
- In FY 2017, the IRS Whistleblower Office made 242 awards to whistleblowers totaling $33.9 million (before sequestration), which includes 27 awards under IRC § 7623(b), representing a 50% increase in the number of IRC § 7623(b) awards as compared to 18 awards paid in FY 2016.
- Award dollars to whistleblowers as a percentage of amounts collected increased to 17.8% from 16.6%.
IRS Whistleblower Program Overview & Whistleblower Program Award Criteria
The IRS Whistleblower Office operates at the direction of the Commissioner of the IRS and coordinates with other IRS units, analyzes information submitted, and makes award determinations.
If a submission does not meet the criteria for IRC § 7623(b) consideration, the IRS may consider it for an award pursuant to its discretionary authority under IRC § 7623(a).
An IRS whistleblower must meet several conditions to qualify for the IRC § 7623(b) award program. According to the IRS Whistleblower Program Annual Report, the information must be:
- Signed and submitted under penalties of perjury;
- Related to an action in which the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2,000,000; and
- Related to a taxpayer, and for individual taxpayers only, one whose gross income exceeds $200,000 for at least one of the tax years in question.
If the information meets the above conditions and substantially contributes to an administrative or judicial action that results in the collection of tax, penalties, interest, additions to tax, or additional amounts, the IRS will pay an award of at least 15 percent but not more than 30 percent of the collected proceeds resulting from the administrative or judicial action (including related actions).
The award percentage decreases for cases based principally on information disclosed in certain public sources or when the whistleblower planned and initiated the actions that led to the underpayment of tax.
Whistleblowers may appeal the IRS Whistleblower Office’s award determinations under IRC § 7623(b) to the United States Tax Court.
The IRS pays awards from collected proceeds, and as such, payments cannot be made until the taxpayer has exhausted all appeal rights and the taxpayer no longer can file a claim for refund. Therefore, typically the IRS does not make award payments for several years after the whistleblower has filed a claim.
IRS Whistleblower Claims Under IRC § 7623
In August 2014, the U.S. Treasury and IRS published final regulations, which, among other things, provide guidance on submitting information regarding tax underpayments or violations, filing claims for award, and the whistleblower administrative proceedings applicable to claims for award under IRC § 7623. The regulations also provide guidance on the determination and payment of awards, and provide definitions of key terms used in IRC § 7623.
The final regulations published in the Federal Register can be viewed by clicking Awards for Information Relating to Detecting Underpayments of Tax or Violations of the Internal Revenue Laws.
The IRS Whistleblower “Informant Award” website page also contains detailed information about the IRS Whistleblower Office and Whistleblower Claims.
The Whistleblower Program Annual Report contained the following data reflecting IRS Whistleblower Program amounts collected and awarded in FY 2015, FY 2016, and FY 2017:
NOTE: The IRS Whistleblower Program Annual Report reflected that whistleblower award and claim data is reported as of September 30, 2017, and “Total Amounts of Award” is before the sequestration reduction.
IRS Whistleblower Program Claims – FY 2017 Closed Whistleblower Claims
According to the IRS Whistleblower Program Annual Report, in FY 2017, the IRS Whistleblower Office closed 14,445 claims, a 31.6 percent decrease from FY 2016 closures.
The most common factors for whistleblower claim closures were:
- Rejected claims with either a non-specific, non-credible, or speculative allegation.
- The issues were below the threshold for IRS action.
- The information was already known to the IRS, lack of resources to pursue a claim, or due to a survey (no tax effects).
- Claims denied due to insufficient time remaining on the statute of limitations or the statute expired before IRS Form 211 (“Application for Award for Original Information”) was submitted.
IRS Whistleblower Actions – Eligibility & Submitting a Whistleblower Claim
The IRS may pay awards to individuals who provide specific and credible information to the IRS if the information results in the collection of taxes, penalties, interest or other amounts from the noncompliant taxpayer. The IRS wants “solid information,” not speculative or unsupported claims, regarding significant federal tax issues. The IRS Whistleblower Program is not designed to resolve personal tax problems or business disputes.
What are the whistleblower rules for getting an IRS Whistleblower Award?
Amount in Dispute Greater than $2 million
If the taxes, penalties, interest and other amounts in dispute exceed $2 million, and a few other qualifications are met, the IRS will pay 15 percent to 30 percent of the amount collected. If the case deals with an individual, his or her annual gross income must be more than $200,000. If the whistleblower disagrees with the outcome of the claim, he or she can appeal to the Tax Court. These rules are found at Internal Revenue Code IRC Section 7623(b) – Whistleblower Rules.
Amount in Dispute Below $2 million or Gross Income Less than $200,000
The IRS also has an award program for other IRS whistleblowers, which, generally, is for those who do not meet the $2 million in dispute threshold or for cases involving individual taxpayers with gross income of less that $200,000. The awards via this program are less, with a maximum award of 15 percent up to $10 million. Further, the awards are discretionary, and the informant (whistleblower) cannot dispute the outcome of the claim in Tax Court. The rules for these cases are found at Internal Revenue Code IRC Section 7623(a) – Informant Claims Program, and some of the rules are different from those that apply to cases involving more than $2 million.
Individuals Who Have Information About Tax Fraud Committed Against the U.S. Government
If you have information or evidence of tax fraud committed against the United States government and would like to speak privately with an attorney about filing an IRS whistleblower claim, please complete the form above on the right, e-mail [email protected] or contact a Kehoe Law Firm attorney.
