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:
- SEC Chairman Jay Clayton Statement on Cryptocurrencies and Initial Coin Offerings(Dec. 11, 2017)
- SEC Division of Enforcement and SEC Office of Compliance Inspections and Examinations Statement on Potentially Unlawful Promotion of Initial Coin Offerings and Other Investments by Celebrities and Others(Nov. 1, 2017)
- Investor Alert: Public Companies Making ICO-Related Claims(Aug. 28, 2017)
- Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO(July 25, 2017)
- Investor Bulletin: Initial Coin Offerings(July 25, 2017)
- Investor Alert: Bitcoin and Other Virtual Currency-Related Investments(May 7, 2014)
- Investor Alert: Ponzi Schemes Using Virtual Currencies(July 23, 2013)
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.