Can My Broker or Investment Advisor Sell Me Cryptocurrency?

Can my broker or investment advisor sell me cryptocurrency (“crypto”)? Is it an investment? The answer is not so simple; no, they cannot sell it directly, but they may try to sell it to you indirectly through a fund or private placement. Rest assured, it is still just as volatile and not appropriate for most investors. Malecki Law is looking into the sale of crypto-based products, as they have been on the rise. Although investors might be intrigued and ecstatic to get into the new shiny investment on the street, it is still a high-risk bet, no matter what your investment professional may say.

Investing in something new can be enticing, but it does not necessarily mean that it is in your best interest as an investor. If you were sold crypto-based products and sustained substantial losses, you need a Crypto-Based Investment law firm in New York, like Malecki Law, to review your potential claim.

What is crypto? Digital assets are the umbrella which crypto falls under. There is a wider range of assets that land under the digital assets umbrella, such as non-fungible tokens (“NFTs”). The common denominator of the variety of digital assets is that they tend to use blockchain technology. Crypto consists of a broad range of virtual currencies, such as Bitcoin (BTC) or Ethereum (ETH).

How does crypto fit in the securities landscape? Some of these firms pride themselves on bringing crypto to the retail investor. However, it is important to keep in mind that crypto-based products are not conventional investments like stocks or bonds, as there are a lot of unknown characteristics that come with them. An unknown characteristic at the forefront is whether a crypto-based product is considered a security, a derivative, or neither. This has its own implications as to whether the SEC, CFTC, or some other governmental agency will have authority and jurisdiction over a specific digital asset. As we have seen thus far in litigation and regulatory actions, this determination seems to be made on a case-by-case basis. You may need a New York Crypto-Based Investment lawyer well-versed in this space, like the lawyers at Malecki Law, to conduct a legal analysis of the product you were sold to determine whether it can be considered a security under relevant securities laws. Many financial industry regulators have actually shown apprehension toward the digital asset space as a whole and have indicated the speculative nature of such assets. SEC Chair Gary Gensler has even called it a “speculative investment class.”

To Malecki Law’s knowledge, there are brokerage firms and registered investment advisors that package up crypto or some other form of digital asset to look like mutual funds or exchange-traded funds (“ETFs”) on the surface. Some of these “funds” are not funds at all, rather, they are limited partnerships whereby investors make a financial commitment to contribute certain amounts of capital over time, in exchange for becoming a limited partner in the so-called fund. For the most part, this means that the so-called funds are not publicly traded and are essentially illiquid investments. Some of the limited partnership agreements will allow for the fund to send capital calls to its partners (investors) at any moment, requiring the investors to continually invest in such funds until their outstanding capital commitment is fulfilled. Due to this investment setup, the investor’s contributed funds are essentially “locked up,” and cannot be used for any other purpose. This is a complex investment strategy that needs to be disclosed and explained at the beginning of an investment relationship and is likely not in the best interest of just any investor. Many rely on a private placement’s Regulation D filing with the SEC to tout the “investment” as “regulated,” but do not be fooled, that does not temper the volatility of the asset or its speculative nature. That is just a safe harbor for them from full registration. You should reach out to a New York Crypto-Based Investment Attorney, like the attorneys at Malecki Law, who are happy to review your situation and investments for free.

Due to the speculative nature of digital assets as a whole and crypto specifically, as well as the illiquidity risks that come with investing in limited partnerships that package up these products, investment firms that sell these kinds of products need to disclose and explain the related risks to their investors. Further, if the firm is a registered FINRA member, it must also comply with FINRA’s rules and regulations, such as Know Your Customer and SEC’s Regulation Best Interest (“Reg BI”). This means that the firm must inquire about a customer’s investing circumstances and needs, such as their investment experience and sophistication, net worth, risk tolerance, time horizon, and liquidity needs. A hypothetical client named Barbara is a retired public school teacher in her 70s with a conservative risk tolerance, who has a need to preserve capital and have access to funds for her growing health concerns. Barbara certainly should not be recommended to invest in a limited partnership solely containing volatile crypto-based funds, 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 products, you need a Crypto-Based Investment law firm in New York, like Malecki Law, to review your investment portfolio and your account opening documents.


Contributions by Jacqueline N. Candella, Associate at Malecki Law

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