CORPORATE/SECURITIES LAW: When is a Coin Really a Security?


At first glance, one would never consider a coin to be a security. Most people think of a coin as a form of currency that we use every day in America – quarters, dimes, nickels, even pennies. We certainly do not expect the Securities and Exchange Commission (the “SEC”) to regulate coins.

However, in the new age of cryptocurrencies, there are situations in which what at first may look like just a coin may actually be considered a security. Cryptocurrency is basically e-money. Some of those most recognizable cryptocurrencies are Bitcoin and Ethereum. Early purchasers of these cryptocurrencies have seen the prices for them fluctuate greatly and over the last few years hit all-time highs. For example, if you purchased 1,000 Bitcoins at $.30 per coin seven years ago, your $300 investment would be worth approximately $9,000,000 today. This astronomical growth has created fertile ground for speculators.

With all the buzz and hype over cryptocurrencies, it was inevitable that lots of people would want to get in on the action. Overnight, companies have been started for the purposes of conducting Initial Coin Offerings (ICOs) and many have raised millions, and even billions, of dollars from investors.

Many times, these ICOs do not comply with federal securities laws. As a result, in past few years, the SEC has brought enforcement actions against several fraudulent offerings and has stopped the trading in several ICOs. Unfortunately, it is unlikely that the actual investors who invested their hard-earned money will ever recoup their money. Typically, the promoters behind the ICOs used the money they raised to fund their own expenses and not for the investment in the coins or token they were selling.

If you want to invest in an ICO, or any security investment for that matter, the following are some steps you should take to protect yourself:

  1. If an offering “guarantees” high investment returns – run! There is no such thing as guaranteed high investment return.
  2. If it sounds too good to be true, it is! Do not invest – use your common sense. Remember, high returns in the past do not mean high returns in the future.
  3. Know from whom you are purchasing – see if they are licensed by the SEC. If they are not, know that you will likely have no recourse against them if you lose your money.
  4. Check to see if the offering is registered with the SEC – if it is not and you are not an accredited investor, chances are the offering may not be in compliance with federal or state securities laws. If it is alleged to be a crowdfunding offering, check to make sure it is being done in compliance with the crowdfunding laws.

Unlike typical currency such as the US dollar and British pound, there are no governmental agencies or banks regulating these cryptocurrencies. Thus, if a cryptocurrency is stolen or the blockchain ledger in which the cryptocurrency is located is hacked, your ability to recover your coins may be minimal. Virtual tokens and virtual currency are susceptible to hacking, fraud, malware and technical glitches. There is no federal insurance such as the FDIC and SIPC to protect your investment in cryptocurrency.

Ten years ago, cryptocurrencies did not exist except in the minds of software developers. These cryptocurrencies are becoming more and more accepted in the retail marketplace as a way to facilitate the flow of goods and money from country to country. It is unlikely that this is a trend or fad that will disappear. Rather, it is much more likely that these new currencies will continue to grow and evolve. However, until there are regulations in place to protect the consumers, such as banking regulations, invest with caution. And remember, if it sounds too good to be true, it is!

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