One of the biggest questions in finance right now is: “Are cryptocurrencies securities?” The Securities and Exchange Commission (SEC) has been increasingly asserting that, yes, cryptocurrencies are securities that must be registered with the commission.
This is not actually true for all crypto use. When cryptocurrencies—such as Bitcoin, Ether, and Litecoin—are merely acting as a replacement for traditional (“flat”) money, the SEC’s position is that these are not a security. Instead, digital currency that acts as a stand-in for traditional cash is a commodity. If that’s the case, it doesn’t trigger SEC registration requirements.
However, if the crypto involves “an investment contract,” then it’s a security that must be registered with the SEC.
Arising out of a 1946 case, SEC v W.J. Howey Co, the test for if something is an investment contract is that there must be:
In other words, if people buy crypto expecting to reap a profit because others are actively working to increase the crypto’s value, then it is a security. And if that’s the case, the firm offering the crypto must comply with the SEC’s registration and investor disclosure requirements.
The SEC is beginning to win major legal challenges using this test.
For example, in 2019, the SEC filed a complaint against Kik Interactive for failing to register its crypto sale and the required investor disclosures. In that case, Kik had raised almost $100 million from investors, fraudulently promising that Kik would be using the money to create a new “ecosystem” that would increase Kik’s crypto value. A Southern District of New York court ruled for the SEC and ordered Kik to pay $5 million in fines.
To put it more simply, if a company sells unregistered crypto assets, it’s likely that the firm is doing so because it wants to avoid the disclosure requirements that could reveal the crypto’s true worth (or lack thereof).
If you’re at a company that is selling unregistered crypto assets, consider if it is inflating the crypto value, misrepresenting how it is working to increase the value, or hiding other key facts that investors should know before investing. If the answer is yes, consider becoming an SEC whistleblower.
If you bring the SEC a tip that leads to successful enforcement, you may be entitled to a sizable cash award.
We have years of experience representing SEC whistleblowers, coupled with an SEC Enforcement lawyer on our team and an in-depth understanding of how the SEC Whistleblower Program operates. We are here to assist whistleblowers attempt to maximize their opportunity to receive a financial bounty. For a free, confidential consultation, email us or call us today at (800) 975-4345.