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SEC and CFTC Issue Joint Investor Alert Regarding Fraudulent Digital Asset Investment Scams
Practical Law Legal Update w-020-2213 (Approx. 5 pages)
SEC and CFTC Issue Joint Investor Alert Regarding Fraudulent Digital Asset Investment Scams
by Practical Law Finance
| Published on 02 May 2019 • USA (National/Federal) |
The SEC and the CFTC have released a joint investor alert warning investors to scrutinize investment opportunities presented on websites claiming to operate advisory and trading businesses related to digital assets.
On April 24, 2019, the SEC and the CFTC (collectively, the agencies) released a joint investor alert warning investors to scrutinize investment opportunities presented on websites claiming to operate advisory and trading businesses related to digital assets. The alert states that these websites often contain “red flags” of fraud including claims of high guaranteed returns and promises that the investments carry little or even no risk.
In the alert, the agencies urge investors to beware of warning signs of investment fraud, including but not limited to:
- Guaranteed high investment returns.
- Complicated jargon and language that is difficult to understand. Investors should always be suspicious of pitches accompanying promises of outsized returns that are difficult to understand.
- Unlicensed sellers. Investors are encouraged to check the seller's license and registration status on the SEC’s Investor.gov.
- Investments that sound too good to be true.
- Unsolicited offers from an unknown seller. Fraudsters often use fake names and misleading images and may provide a US contact number despite being located overseas.
- Pressure to buy immediately.
The alert encourages investors to take time to research before making any investment and:
- Carefully read all materials and verify the truth of every statement about the investment. The SEC provides a resource on how to research an investment.
- Investigate the individuals and firms offering the investment, investigate their backgrounds on Investor.gov and by contacting the applicable state securities regulator.
- Check for disciplinary history with the CFTC and visit the CFTC RED List, which lists entities that have been identified as acting in a capacity that appears to require CFTC registration, but which are not appropriately registered with the CFTC.
- Research individuals who have had judgments or orders issued against them in SEC court actions or administrative proceedings using the SEC action lookup for individuals.
Finally, the alert states that if an investor has already invested in an offering that may be fraudulent or where the investor has been asked to pay additional money to receive returns on an investment, this should be reported to the agencies.
Update: On April 30, 2019, the SEC issued an investor alert, warning investors of misrepresentations regarding SEC approval of token offerings. This alert was issued in response to instances in which sponsors of initial coin offerings (ICOs) have promoted investments using SEC forms and filings as indications that the investment has been approved by the SEC.
In the alert, the SEC clarifies that filings on the SEC's database do not indicate SEC-registration status. The alert provides a reminder that a market participant may not offer or sell securities unless the transaction has either been registered with the SEC or an exemption from registration applies. The alert also provides a summary and explanations of certain filings that market participants may be required to make in order to claim certain applicable exemptions such as:
- Form D notice.
- Regulation A.
- Regulation crowdfunding.