SEC Ramps Up War Against Crypto With New Investor AlertThe U.S. Securities and Exchange Commission (SEC) has issued a new alert to warn investors of potential risks associated with investments in cryptocurrency.
The alert highlights that companies and platforms offering crypto asset investments or services may not be complying with applicable laws, including federal securities laws.
The registration requirements
According to the federal securities laws, a company may not offer or sell securities unless the offering is registered with the SEC or an exemption to registration is available.
The law also requires parties such as securities broker-dealers, investment advisers, alternative trading systems (ATS), and exchanges to register with the SEC or a self-regulatory organization (SRO), such as FINRA. Failure to register may deprive investors of key information needed to make informed decisions.
Unregistered offerings in crypto asset securities may not provide financial statements audited by an independent public accounting firm registered with the Public Company Accounting Oversight Board (PCAOB).
Audited financial statements play an important role in making sure investors are provided with the information they need to understand the securities in which they want to invest.
Proof of Reserves is a term used by crypto asset entities, including trading platforms and entities that issue crypto assets securities, to describe a voluntary method for offering evidence that in the aggregate an entity has sufficient reserve assets to cover what is held for customers and/or accounts at a given point in time.
While crypto asset entities may be offering these types of assessments as a way to satisfy customers that their funds are safe and available upon demand, the SEC warns that these types of services may not provide meaningful assurance that these entities hold adequate assets to back their customers’ balances.
The SEC also highlights the importance of registration with the SEC by an entity as a “broker-dealer” and/or “investment adviser” for the protection of investors.
These protections include rules around custody of assets, fees, conflicts of interest, standards of conduct, and minimal capital requirements for broker-dealers.
SEC-registered entities are also subject to examination by regulators, and investors benefit from protections offered by the Securities Investor Protection Corporation (SIPC) and other regulatory bodies.
Risks of investing in crypto assets: SEC
Investments in crypto asset securities can be exceptionally risky and volatile, and over the past year, a number of major platforms and crypto assets have become insolvent and/or lost value.
Investors who deposit funds or crypto assets with a crypto asset securities entity might cease to have legal ownership of those assets and might not be able to get those assets back when they want to. The SEC warns of the potential for fraud, Ponzi and pyramid schemes, and outright theft in the crypto asset space.
The SEC also warns investors of celebrity endorsements, which do not mean that an investment is appropriate for all investors or even legitimate.
Celebrity endorsements may be paid promotions, and investors should consider the potential risks and opportunities to determine whether an investment opportunity is right for them.
Before making any investment, the SEC advises investors to create and follow an investment plan, pay off high-interest debt first, and consider the importance of asset allocation and diversification. Investors should also understand risk and the terms of the investment before investing.
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