Apr 9, 2018 | Shareholder & Investor Protection
Important Things to Know About Ponzi Schemes Which Target Seniors
The SEC’s Office of Investor Education and Advocacy and Retail Strategy Task Force issued a warning to senior investors, many of whom have spent many years saving and investing, about fraudulent Ponzi schemes. In a Ponzi scheme, fraudsters use money they collect from new investors to pay existing investors. And what appears to be a return on your investment is actually money from another investor who has been swindled.
Ponzi Scheme Warning Signs
Promises of High Returns with Little or No Risk.
Guaranteed, high-investment returns are the hallmark of a Ponzi scheme. Every investment has risk, and the potential for high returns usually comes with high risk. If it sounds too good to be true, it probably is.
Unlicensed and Unregistered Sellers.
Most Ponzi schemes involve individuals or firms that are not licensed or registered. Even if an investment professional comes across as likeable or trustworthy, research the individual here to determine whether he or she is licensed and registered.
Overly Consistent Returns & Aggressive Sales Ploys
Investment values tend to fluctuate over time. Be skeptical of an investment that generates steady positive returns regardless of market conditions.
Be wary of aggressive sales ploys, such as pressure to buy immediately and persuasion tactics such as offering investment seminars with a free meal. Take your time deciding whether an investment is right for you and don’t give any money until you have confirmed for yourself that the seller is licensed and registered.
For investments that you already have, be suspicious if you have problems getting paid or if you are pressured to rollover your investments. Ponzi scheme promoters sometimes try to prevent investors from cashing out by offering even higher returns for staying invested.
SEC Ponzi Scheme Enforcement Actions
The SEC has brought enforcement actions involving Ponzi schemes aimed at seniors, including:
In the Lifepay Group, LLC matter, two defendants conducted an alleged Ponzi scheme that targeted seniors and their retirement savings. The SEC alleged that the defendants offered investors unregistered promissory notes, telling them that their money would be used for real estate investments that would generate high returns. To keep the Lifepay scam going, the defendants, allegedly, used the money of new investors to pay earlier investors and convinced investors to rollover their investments into new promissory notes for larger amounts. According to the SEC’s complaint, the defendants only invested a small portion of investor money in real estate and stole roughly $1.3 million to pay for personal expenses.
In the Woodbridge matter, the defendants, allegedly, conducted a $1.2 billion Ponzi scheme in which thousands of people invested their retirement savings. The SEC alleged that the defendants employed hundreds of sales agents to advertise through television, radio, newspaper, cold calls, social media, websites, seminars, and in-person presentations. According to the SEC’s complaint, although the defendants claimed that investors would get paid revenue from high-interest loans to third parties, the defendants really used money from new investors to pay returns owed to existing investors. One defendant allegedly used $21 million of investor money for his own extravagant personal expenditures.
Source: Investor.gov
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
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.
Dec 31, 2017 | Shareholder & Investor Protection
Cryptocurrency & Initial Coin Offerings – SEC Chairman’s “Statement on Cryptocurrencies and Initial Coin Offerings”
On December 11, 2017, SEC Chairman Jay Clayton issued a “Statement on Cryptocurrencies and Initial Coin Offerings.” The statement provided the SEC Chairman’s general views on the cryptocurrency and ICO markets and, among other things, important considerations for “Main Street” investors involved with cryptocurrency- and ICO-related investments.**
Image: Pixabay, Gerd Altmann (geralt), CC0 1.0 Universal
Select Highlights of the SEC Chairman’s Statement Regarding Cryptocurrency and Initial Coin Offerings
The cryptocurrency and Initial Coin Offering markets have grown rapidly. The cryptocurrency and Initial Coin Offering markets are local, national and international and include an ever-broadening range of products and participants. The cryptocurrency and ICO markets also present investors and other market participants with many questions, such as:
- Is the product legal?
- Is it subject to regulation, including rules designed to protect investors?
- Does the product comply with those rules?
- Is the offering legal?
- Are those offering the product licensed to do so?
- Are the trading markets fair?
- Can prices on those markets be manipulated?
- Can I sell when I want to?
- Are there substantial risks of theft or loss, including from hacking?
Cryptocurrency & Initial Coin Offerings – Considerations for “Main Street” Investors
A number of concerns have been raised regarding the cryptocurrency and ICO markets, including that, as they are currently operating, there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation.
Investors should understand that, to date, no initial coin offerings have been registered with the SEC. The SEC also has not, to date, approved for listing and trading any exchange-traded products (e.g., ETFs) holding cryptocurrencies or other assets related to cryptocurrencies. If any person today tells you otherwise, be especially wary.
The CFTC has designated bitcoin as a commodity. Fraud and manipulation involving bitcoin traded in interstate commerce are appropriately within the purview of the CFTC, as is the regulation of commodity futures tied directly to bitcoin. That said, products linked to the value of underlying digital assets, including bitcoin and other cryptocurrencies, may be structured as securities products subject to registration under the Securities Act of 1933 or the Investment Company Act of 1940.
Cryptocurrency & Initial Coin Offerings- Investors: Ask Questions & Get Clear Answers!!
Questions for Investors Considering Cryptocurrency or ICO Investments
- Who exactly am I contracting with?
- Who is issuing and sponsoring the product, what are their backgrounds, and have they provided a full and complete description of the product? Do they have a clear written business plan that I understand?
- Who is promoting or marketing the product, what are their backgrounds, and are they licensed to sell the product? Have they been paid to promote the product?
- Where is the enterprise located?
- Where is my money going and what will be it be used for? Is my money going to be used to “cash out” others?
- What specific rights come with my investment?
- Are there financial statements? If so, are they audited, and by whom?
- Is there trading data? If so, is there some way to verify it?
- How, when, and at what cost can I sell my investment? For example, do I have a right to give the token or coin back to the company or to receive a refund? Can I resell the coin or token, and if so, are there any limitations on my ability to resell?
- If a digital wallet is involved, what happens if I lose the key? Will I still have access to my investment?
- If a blockchain is used, is the blockchain open and public? Has the code been published, and has there been an independent cybersecurity audit?
- Has the offering been structured to comply with the securities laws and, if not, what implications will that have for the stability of the enterprise and the value of my investment?
- What legal protections may or may not be available in the event of fraud, a hack, malware, or a downturn in business prospects? Who will be responsible for refunding my investment if something goes wrong?
- If I do have legal rights, can I effectively enforce them and will there be adequate funds to compensate me if my rights are violated?
As with any other type of potential investment, if a promoter guarantees returns, if an opportunity sounds too good to be true, or if you are pressured to act quickly, please exercise extreme caution and be aware of the risk that your investment may be lost.
Image: Pixabay, Gerd Altmann (geralt), CC0 1.0 Universal
Cryptocurrency & Initial Coin Offerings – Cryptocurrencies, ICOs & Securities Registration
Cryptocurrencies. Cryptocurrencies purport to be items of inherent value (similar, for instance, to cash or gold) that are designed to enable purchases, sales and other financial transactions. They are intended to provide many of the same functions as long-established currencies such as the U.S. dollar, euro or Japanese yen, but do not have the backing of a government or other body.
Although the design and maintenance of cryptocurrencies differ, proponents of cryptocurrencies highlight various potential benefits and features of them, including (1) the ability to make transfers without an intermediary and without geographic limitation, (2) finality of settlement, (3) lower transaction costs compared to other forms of payment and (4) the ability to publicly verify transactions. Other often-touted features of cryptocurrencies include personal anonymity and the absence of government regulation or oversight. Critics of cryptocurrencies note that these features may facilitate illicit trading and financial transactions, and that some of the purported beneficial features may not prove to be available in practice.
It has been asserted that cryptocurrencies are not securities and that the offer and sale of cryptocurrencies are beyond the SEC’s jurisdiction. Whether that assertion proves correct with respect to any digital asset that is labeled as a cryptocurrency will depend on the characteristics and use of that particular asset.
Initial Coin Offerings. Coinciding with the substantial growth in cryptocurrencies, companies and individuals increasingly have been using initial coin offerings to raise capital for their businesses and projects. Typically, these offerings involve the opportunity for individual investors to exchange currency such as U.S. dollars or cryptocurrencies in return for a digital asset labeled as a coin or token.
These offerings can take many different forms, and the rights and interests a coin is purported to provide the holder can vary widely. A key question for all ICO market participants: “Is the coin or token a security?” As securities law practitioners know well, the answer depends on the facts. For example, a token that represents a participation interest in a book-of-the-month club may not implicate our securities laws, and may well be an efficient way for the club’s operators to fund the future acquisition of books and facilitate the distribution of those books to token holders. In contrast, many token offerings appear to have gone beyond this construct and are more analogous to interests in a yet-to-be-built publishing house with the authors, books and distribution networks all to come. It is especially troubling when the promoters of these offerings emphasize the secondary market trading potential of these tokens. Prospective purchasers are being sold on the potential for tokens to increase in value – with the ability to lock in those increases by reselling the tokens on a secondary market – or to otherwise profit from the tokens based on the efforts of others. These are key hallmarks of a security and a securities offering.
By and large, the structures of initial coin offerings that the SEC Chairman has seen promoted involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of the U.S. federal securities laws. Generally speaking, these laws provide that investors deserve to know what they are investing in and the relevant risks involved.
It is possible to conduct an ICO without triggering the SEC’s registration requirements. For example, just as with a Regulation D exempt offering to raise capital for the manufacturing of a physical product, an initial coin offering that is a security can be structured so that it qualifies for an applicable exemption from the registration requirements.
Cryptocurrency & Initial Coin Offerings – SEC-Related Alerts, Bulletins & Statements
The SEC has issued the following investor alerts, bulletins, and statements on initial coin offerings and cryptocurrency-related investments, including those related to the marketing of certain offerings and investments by celebrities and others:
Statement on Potentially Unlawful Promotion of Initial Coin Offerings and Other Investments by Celebrities and Others (Nov. 1, 2017), available at https://www.sec.gov/news/public-statement/statement-potentially-unlawful-promotion-icos
Investor Alert: Public Companies Making ICO-Related Claims (Aug. 28, 2017), available at https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_icorelatedclaims
Investor Bulletin: Initial Coin Offerings (July 25, 2017), available athttps://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_coinofferings
Investor Alert: Bitcoin and Other Virtual Currency-Related Investments (May 7, 2014), available athttps://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-alert-bitcoin-other-virtual-currency
Investor Alert: Ponzi Schemes Using Virtual Currencies (July 23, 2013), available at https://www.sec.gov/investor/alerts/ia_virtualcurrencies.pdf.
See also Kehoe Law Firm’s “Initial Coin Offerings – Be Aware of Potential Initial Coin Offering Risks” posting providing information from the SEC’s Office of Investor Education and Advocacy.
Cryptocurrency & Initial Coin Offerings – SEC Enforcement Actions
Press Release, Company Halts ICO After SEC Raises Registration Concerns (Dec. 11, 2017), available at https://www.sec.gov/news/press-release/2017-227
Press Release, SEC Emergency Action Halts ICO Scam (Dec. 4, 2017), available at https://www.sec.gov/news/press-release/2017-219
Press Release, SEC Exposes Two Initial Coin Offerings Purportedly Backed by Real Estate and Diamonds (Sept. 29, 2017), available at https://www.sec.gov/news/press-release/2017-185-0.
**The SEC Chairman’s statement contained a footnote which stated that the information in the SEC Chairman’s statement is his own and does not reflect the views of any other Commissioner or the Commission. Further, the SEC Chairman’s statement is not, and should not be taken as, a definitive discussion of applicable law, all the relevant risks with respect to these products, or a statement of the SEC Chairman’s position on any particular product. Additionally, the SEC Chairman’s statement is not a comment on any particular submission, in the form of a proposed rule change or otherwise, pending before the SEC.
Source: “Statement on Cryptocurrencies and Initial Coin Offerings” (December 11, 2017) by SEC Chairman Jay Clayton, available at https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11#_ftn6 (last accessed 12.31.2017).
Cryptocurrency (“Bitcoin”) & Initial Coin Offering Investors
If you are an investor of cryptocurrency (e.g., Bitcoin) or Initial Coin Offerings and have concerns about your legal rights or potential legal claims and wish to speak privately with a securities attorney, please complete the form above on the right or e-mail [email protected].
Dec 29, 2017 | Shareholder & Investor Protection
Initial Coin Offerings – ICOs
The SEC’s Office of Investor Education and Advocacy has provided the following information to make investors aware of the potential risks of participating in Initial Coin Offerings – ICOs:*
Initial Coin Offerings, also known as ICOs or token sales, are being used to raise capital; however, new technologies and financial products, such as those associated with Initial Coin Offerings, can be used improperly to entice investors with the promise of high returns in a new investment space.
Initial Coin Offerings – Virtual Coins & Tokens – Background
Virtual coins or tokens are created and disseminated using distributed ledger or blockchain technology. Recently, promoters have been selling virtual coins or tokens in Initial Coin Offerings. Purchasers may use fiat currency (e.g., U.S. dollars), or virtual currencies, to buy virtual coins or tokens. Promoters may tell purchasers that the capital raised from the sales will be used to fund development of a digital platform, software, or other projects and that the virtual tokens or coins may be used to access the platform, use the software, or otherwise participate in the project.
Some promoters and initial sellers may lead buyers of the virtual coins or tokens to expect a return on their investment or to participate in a share of the returns provided by the project. After they are issued, the virtual coins or tokens may be resold to others in a secondary market on virtual currency exchanges or other platforms.
Depending on the facts and circumstances of each individual ICO, the virtual coins or tokens that are offered or sold may be securities. If they are securities, the offer and sale of these virtual coins or tokens in an ICO are subject to the federal securities laws.
SEC’s Investigation of a Virtual Organization – Federal Securities Laws Apply
The SEC’s “Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO” describes an SEC investigation of The DAO, a virtual organization, and its use of distributed ledger or blockchain technology to facilitate the offer and sale of DAO Tokens to raise capital.
The SEC applied existing U.S. federal securities laws to determine that DAO Tokens were securities. The SEC emphasized that those who offer and sell securities in the United States are required to comply with federal securities laws, regardless of whether those securities are purchased with virtual currencies or distributed with blockchain technology.
The SEC investigative report stated that its investigative
. . . [r]eport reiterates these fundamental principles of the U.S. federal securities laws and describes their applicability to a new paradigm—virtual organizations or capital raising entities that use distributed ledger or blockchain technology to facilitate capital raising and/or investment and the related offer and sale of securities. The automation of certain functions through this technology, “smart contracts,”[] or computer code, does not remove conduct from the purview of the U.S. federal securities laws.[] This Report also serves to stress the obligation to comply with the registration provisions of the federal securities laws with respect to products and platforms involving emerging technologies and new investor interfaces. [Emphasis added]
Image: Pixabay, Gerd Altmann (geralt), CC0 1.0 Universal
Initial Coin Offerings & Virtual Currency – Some Concepts to Help Investors Understand a New, Complex Investment Area
Blockchain
A blockchain is an electronic distributed ledger or list of entries – much like a stock ledger – that is maintained by various participants in a network of computers. Blockchains use cryptography to process and verify transactions on the ledger, providing comfort to users and potential users of the blockchain that entries are secure. Examples of blockchain are the Bitcoin and Ethereum blockchains, which are used to create and track transactions in bitcoin and ether, respectively.
Virtual Currency, Token or Coin
A virtual currency is a digital representation of value that can be digitally traded and functions as a medium of exchange, unit of account, or store of value. Virtual tokens or coins may represent other rights as well. Accordingly, in certain cases, the tokens or coins will be securities and may not be lawfully sold without registration with the SEC or pursuant to an exemption from registration.
Virtual Currency Exchange
A virtual currency exchange is a person or entity that exchanges virtual currency for fiat currency, funds, or other forms of virtual currency. Virtual currency exchanges typically charge fees for these services. Secondary market trading of virtual tokens or coins may also occur on an exchange. These exchanges may not be registered securities exchanges or alternative trading systems regulated under the federal securities laws. Accordingly, in purchasing and selling virtual coins and tokens, you may not have the same protections that would apply in the case of stocks listed on an exchange.
Issuance of Virtual Tokens or Coins
Virtual tokens or coins may be issued by a virtual organization or other capital raising entity. A virtual organization is an organization embodied in computer code and executed on a distributed ledger or blockchain. The code, often called a “smart contract,” serves to automate certain functions of the organization, which may include the issuance of certain virtual coins or tokens.
Initial Coin Offerings – Participation in an Initial Coin Offering – Things to Consider
Depending on the facts and circumstances, the offering may involve the offer and sale of securities. If that is the case, the offer and sale of virtual coins or tokens must itself be registered with the SEC, or be performed pursuant to an exemption from registration. Before investing in an ICO, ask whether the virtual tokens or coins are securities, whether the persons selling them registered the offering with the SEC, in addition to keeping the following in mind about registration:
-If an offering is registered, you can find information (e.g., registration statement or “Form S-1”) on SEC.gov through the SEC’s EDGAR.
-If a promoter states that an offering is exempt from registration, and you are not an accredited investor, you should be very careful – most exemptions have net worth or income requirements.
-Although Initial Coin Offerings are sometimes described as crowdfunding contracts, it is possible that they are not being offered and sold in compliance with the requirements of Regulation Crowdfunding or with the federal securities laws generally.
Ask what your money will be used for and what rights the virtual coin or token provides to you. The promoter should have a clear business plan that you can read and that you understand. The rights the token or coin entitles you to should be clearly laid out, often in a white paper or development roadmap. You should specifically ask about how and when you can get your money back in the event you wish to do so. For example, do you have a right to give the token or coin back to the company or to receive a refund? Can you resell the coin or token? Are there any limitations on your ability to resell the coin or token?
If the virtual token or coin is a security, federal and state securities laws require investment professionals and their firms who offer, transact in, or advise on investments to be licensed or registered. At Investor.gov, one can check the registration status and background of these investment professionals.
Ask whether the blockchain is open and public, whether the code has been published, and whether there has been an independent cybersecurity audit.
Fraudsters often use innovations and new technologies to perpetrate fraudulent investment schemes. Fraudsters may entice investors by touting an Initial Coin Offering investment “opportunity” as a way to get into this cutting-edge space, promising or guaranteeing high investment returns. Investors should always be suspicious of jargon-laden pitches, hard sells, and promises of outsized returns. Also, it is relatively easy for anyone to use blockchain technology to create an ICO that looks impressive, even though it might actually be a scam.
Virtual currency exchanges and other entities holding virtual currencies, virtual tokens or coins may be susceptible to fraud, technical glitches, hacks, or malware. Virtual tokens or virtual currency may be stolen by hackers.
Investing in an Initial Coin Offering may limit your recovery in the event of fraud or theft. While you may have rights under the federal securities laws, your ability to recover may be significantly limited.
If fraud or theft results in you or the organization that issued the virtual tokens or coins losing virtual tokens, virtual currency, or fiat currency, you may have limited recovery options. Third-party wallet services, payment processors, and virtual currency exchanges that play important roles in the use of virtual currencies may be located overseas or be operating unlawfully.
Initial Coin Offerings – Law Enforcement Challenges & Possible Limitations on Investor Remedies
Law enforcement officials may face particular challenges when investigating ICOs and, as a result, investor remedies may be limited. Challenges include:
Tracing money. Traditional financial institutions (such as banks) often are not involved with ICOs or virtual currency transactions, making it more difficult to follow the flow of money.
International scope. ICOs and virtual currency transactions and users span the globe. Although the SEC regularly obtains information from abroad (such as through cross-border agreements), there may be restrictions on how the SEC can use the information and it may take more time to get the information. In some cases, the SEC may be unable to obtain information from persons or entities located overseas.
No central authority. As there is no central authority that collects virtual currency user information, the SEC generally must rely on other sources for this type of information.
Freezing or securing virtual currency. Law enforcement officials may have difficulty freezing or securing investor funds that are held in a virtual currency. Virtual currency wallets are encrypted and unlike money held in a bank or brokerage account, virtual currencies may not be held by a third-party custodian.
“Guaranteed” high investment returns. There is no such thing as guaranteed high investment returns. Be wary of anyone who promises that you will receive a high rate of return on your investment, with little or no risk.
Unsolicited offers. An unsolicited sales pitch may be part of a fraudulent investment scheme. Exercise extreme caution if you receive an unsolicited communication—meaning you didn’t ask for it and don’t know the sender—about an investment opportunity.
Sounds too good to be true. If the investment sounds too good to be true, it probably is. Remember that investments providing higher returns typically involve more risk.
Pressure to buy RIGHT NOW. Fraudsters may try to create a false sense of urgency to get in on the investment. Take your time researching an investment opportunity before handing over your money.
Unlicensed sellers. Many fraudulent investment schemes involve unlicensed individuals or unregistered firms. Check license and registration status on Investor.gov.
No net worth or income requirements. The federal securities laws require securities offerings to be registered with the SEC unless an exemption from registration applies. Many registration exemptions require that investors are accredited investors; some others have investment limits. Be highly suspicious of private (i.e., unregistered) investment opportunities that do not ask about your net worth or income or whether investment limits apply.
Pixabay, QuinceMedia, CC0 1.0 Universal
Initial Coin Offering Investors
If you invested in an Initial Coin Offering and wish to speak privately with a securities attorney about your potential legal rights, please complete the form on the right or e-mail [email protected].
*Source: U.S. Securities and Exchange Commission’s “Investor Bulletin: Initial Coin Offerings,” available at Investor.gov.
