Are Crypto-based Securities Investments Safe For Retail Investors?

Although many investors might be intrigued and ecstatic to get into the new shiny investment on the street, is it safe?

Many new crypto firms seem to have one mission in common, to bring digital assets to the retail investor, like yourself. However, digital assets are not conventional investments or regulated like stocks or bonds, and there are still a lot of “unknowns” that come with investing in digital assets. Starting with, whether it is considered a security or commodity, or neither. If a financial advisor sold you crypto-based securities investments (such as cryptos or digital assets in private placements or funds) and you sustained substantial losses, a New York Crypto Investment Fraud Law Firm, like Malecki Law, can review your holdings for free.

A hot-button issue is whether the SEC, CFTC, or some other governmental agency will have the authority and jurisdiction to regulate digital assets. Many financial industry regulators have been apprehensive about the digital asset space and have highlighted the speculative nature of such assets. SEC Chair Gary Gensler has even called it a “speculative investment class.”

The SEC has brought just under 130 crypto-related enforcement actions since 2013. The SEC’s focus on this space is constantly on an incline, as it brought about 30 crypto-related enforcement actions in 2022, alone. A common allegation of these actions involves some type of fraud related to the offer or sale of securities. If you sense that there may have been some sort of fraudulent activity regarding the crypto-based securities investments like funds or private funds offered and/or sold to you, you need to reach out to a Crypto Investment Fraud Lawyer in New York, like the lawyers at Malecki Law.

As an investor, you should be aware that some firms sell funds that are tied to crypto, rather than purchasing the digital asset itself. This is something to keep in mind because it can present its own risks such as liquidity as well as risks because it is tied to a volatile asset.

For example, some of these investments can be limited partnerships whereby investors, like yourself, enter into a partnership agreement with issuers. In doing so, the investor becomes a limited partner. In these kinds of partnership agreements, the investor commits to a certain overall capital contribution to be paid over the time stated or agreed upon. This means that the investment is not publicly traded. If you have made a capital commitment for a future investment, you can receive capital calls at any moment to deposit funds, until your outstanding capital commitment, per the partnership agreement, is satisfied. This essentially means that your funds are “locked up.” Thus, such an investment would not be in the best interest of an investor who prioritizes liquidity, has a low-risk tolerance, and/or has a short time horizon. Are your funds “locked up” in a crypto-based investment? You should consult with a New York Crypto Investment Fraud Attorney, like the attorneys at Malecki Law, who are happy to read and analyze your investment agreements, to determine whether you have a case.

Due to the speculative nature of digital assets and the illiquid aspects of investing in these limited partnerships, firms need to disclose and explain the related risks to their investors. Moreover, especially if a firm is a registered FINRA member firm, it must comply with FINRA’s rules and regulations, such as Know Your Customer (KYC) and the SEC’s Regulation Best Interest (Reg BI) standard. Meaning, your firm and/or advisor should inquire about your investing circumstances and needs, such as your net worth, risk tolerance, time horizon, and liquidity needs.

It is important to know whether your financial advisor is working in the capacity of a stockbroker or an investment advisor representative (IAR). This is because IARs are held to different standards than stockbrokers. IARs are either registered through the Securities and Exchange Commission (SEC) or their respective state regulators and must follow rules under the Investment Advisers Act of 1940 (IAA). IARs are agents of registered investment advisers (RIAs). IARs and RIAs are held to the “fiduciary duty” standard, which is a higher degree of care that is owed to their clients when managing their investment portfolios and making investment recommendations. The fiduciary duty standard includes duties of care and loyalty. If it seems as though your IAR may have engaged in self-dealing when making an investment recommendation to you, they may have breached their fiduciary duty owed to you.

A hypothetical client in her 70s with a conservative risk tolerance and need to preserve capital and have access to funds, certainly should not be recommended to invest in limited partnerships tied to digital assets, therefore it would likely not be in her “best interest” under the Reg BI standard. If you have suffered losses and think you have been wrongfully recommended to invest in crypto-based securities investments, you need a Crypto Investment Fraud Law Firm in New York, like Malecki Law to review your portfolio and its related forms.