SEC makes it clear cryptocurrency not exempt from securities laws
If one was to sum up the MLM industry in 2017, there is no doubt it is the year cryptocurrency opportunities took off.
Sadly I’ve yet to see one that’s even remotely legitimate, with the vast majority simply fiat Ponzi schemes swapped out with a cryptocurrency (be it bitcoin, an ICO, or non-publicly tradeable points).
Here at BehindMLM we observed the marriage between cryptocurrency and MLM emerge during 2014.
Over 2015 and 2016 the MLM cryptocurrency niche grew rapidly, mostly due to the ruthless targeting of those new to cryptocurrency. What might have started out as genuine attempts to spread cryptocurrency awareness, soon saw “let met educate on cryptocurrency” deteriorate into “let me pitch you on my latest Ponzi scam”.
In 2017 the development of off-the-shelf ICO scripts and meteoric rise of bitcoin’s value, meant all of a sudden everyone in MLM was a “cryptocurrency expert”.
As has the development side of the MLM cryptocurrency niche taken a few years to get going, so too has regulation. At least in the US.
Whereas Europe for the most part apart appears to be content issuing warnings and then sitting back and watching investors lose millions of dollars, SEC Chairman Jay Clayton has revealed a decidedly different approach.
BehindMLM’s stance on MLM cryptocurrency investment opportunities has been that they are clearly securities offering.
The legal definition of a security in the US encompasses any passive investment opportunity.
As far as MLM goes, the formula behind pretty much every MLM cryptocurrency opportunity is thus:
give us money + cryptowaffle = sit back and we’ll pay you more than you gave us
“Cryptowaffle” could be anything from mining, an ICO launch, crypto trading, arbitrage and so on and so forth.
Regardless of the ruse, you’d have to be blind not to be able to readily identify a securities offering.
Or intentionally deceptive.
Signalling what the MLM cryptocurrency niche can expect from the SEC going into 2018, on December 11th Chairman Jay Clayton published a “Statement on Cryptocurrencies and Initial Coin Offerings“.
In his statement, Clayton advised
market participants should treat payments and other transactions made in cryptocurrency as if cash were being handed from one party to the other.
This is key in destroying the myth that just because a Ponzi scheme is using cryptocurrency, somehow the rules don’t apply to them.
Or as Clayton puts it, ‘We are hearing the familiar refrain, “this time is different.”’
Investors should understand that to date no initial coin offerings have been registered with the SEC.
There is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation.
If you choose to invest in these products, please ask questions and demand clear answers.
Sadly this is advice that most MLM cryptocurrency investors choose to ignore.
Time and time again in our MLM cryptocurrency reviews we’ve noted a lack of disclosure of ROI revenue.
When asked, owners of these companies palm the question of with “coming soon” excuses, proof of external revenue generation (but not of it being used to pay ROIs with), or claims of “proprietary secrets”.
Put bluntly, none of those responses are acceptable.
Especially when there’s a good chance invested funds are being squirreled away offshore without investor knowledge.
Please also recognize that these markets span national borders and that significant trading may occur on systems and platforms outside the United States.
Your invested funds may quickly travel overseas without your knowledge.
As a result, risks can be amplified, including the risk that market regulators, such as the SEC, may not be able to effectively pursue bad actors or recover funds.
Perhaps the most pertinent question anyone considering an MLM cryptocurrency offering can ask is, “If this was in fiat (USD, EUR etc.), would I be getting involved?”
If you can swap out cryptocurrency for fiat in a business model and clearly identify a Ponzi scheme, make no mistake – that business model is still a Ponzi scheme with cryptocurrency swapped back in.
In an effort to assist potential investors, Jay Clayton provides the following due-diligence sample questions:
-Who exactly am I contracting with?
-Who is issuing and sponsoring the product, what are their backgrounds, and have they provided a full and complete description of the product?
If you can’t identify who is running the company, forget about the business model – run.
Do they have a clear written business plan that I understand?
Thankfully this isn’t an issue in the MLM cryptocurrency space.
As I stated previously, most MLM cryptocurrency offering can be boiled down to:
invest money + “Wowowow cryptocurrency!” = receive more than you invested
Who is promoting or marketing the product, what are their backgrounds, and are they licensed to sell the product?
At the top of every MLM cryptocurrency company are either management or investors with a long history of participation in fraudulent schemes.
You only need to research their names to confirm this.
Have they been paid to promote the product?
Where is the enterprise located?
Be particularly wary of MLM cryptocurrency companies pitching to US residents that claim to be based in offshore jurisdictions with little to no regulation (anywhere in the UAE, BVI, Seychelles, Cyprus, Hong Kong, anywhere in Africa etc.).
Where is my money going and what will be it be used for? Is my money going to be used to “cash out” others?
This is key to identification of a Ponzi scheme.
If you can’t verify external revenue is being used to pay ROI and commissions (accept nothing less than third-party audited accounting reports), your invested funds are being used to pay existing investors.
It’s really that simple.
What specific rights come with my investment?
MLM cryptocurrency investors have no rights. Their accounts can be terminated at whim.
-Are there financial statements? If so, are they audited, and by whom?
-Is there trading data? If so, is there some way to verify it?
No third-party audited accounting verifying the use of external revenue to pay ROIs? You’re in a Ponzi scheme.
-If a blockchain is used, is the blockchain open and public?
-Has the code been published, and has there been an independent cybersecurity audit?
Although this model has mostly given way to bitcoin-based Ponzi schemes, there’s still a lot of money tied up in failed non-public coins.
There’s a good chance any MLM company that claims to have a blockchain for their coin but won’t let you see it, doesn’t actually have one (meaning they’re entire business model is simply a ruse).
-Has the offering been structured to comply with the securities laws and, if not, what implications will that have for the stability of the enterprise and the value of my investment?
As discussed above, switch out cryptocurrency for cash. Can you see a passive investment opportunity that requires registration with a securities regulator?
The SEC’s Edgar database is free to search. If you can’t find your MLM cryptocurrency company in the SEC’s database, they’re operating illegally.
The bottom line?
any such activity that involves an offering of securities must be accompanied by the important disclosures, processes and other investor protections that our securities laws require.
A change in the structure of a securities offering does not change the fundamental point that when a security is being offered, our securities laws must be followed.
Here’s to the SEC reigning in MLM cryptocurrency Ponzi fraud in 2018.