SEC Warns Investors to Exercise Caution When Investing in Crypto Securities – Clampdown Incoming?

The Securities and Exchange Commission (SEC) has warned investors of an alleged danger posed by crypto assets, saying those offering such investments may not comply with US securities laws.

The warning, published on the SEC’s Investor.gov website on Thursday this week, said the risk of loss for individuals who invest in crypto “remains significant,” and urged the public to only invest money they can “afford to lose entirely.”

The SEC warned that companies offering crypto assets for investment must be registered with the SEC, unless specific exemptions apply. It also said that companies that specifically offer crypto lending or staking services “may be subject to the federal securities laws.”

Investments in crypto asset securities can be exceptionally volatile & speculative, & the platforms where investors buy, sell, borrow/lend these securities may lack important protections for investors.
@SEC_Investor_Ed to investors: exercise caution w/ crypto asset securities.

— U.S. Securities and Exchange Commission (@SECGov) March 23, 2023

The SEC has in recent days and weeks cracked down hard on companies in the crypto space for offering what is referred to as “unregistered securities.” Among the companies that have found itself in hot water over this is the major exchange Coinbase, which just this week was threatened with a lawsuit by the SEC.

Proof-of-reserves not comparable to an audit

Commenting on the proof-of-reserves concept that has become popular among crypto exchanges, the SEC noted that these in no way can be compared to traditional audits. It said that proof-of-reserves “may not provide any level of assurance,” given that there are no specific requirements for how information is reported:

“In sum, investors should exercise extreme caution when relying on proof of reserves to conclude that a crypto asset entity has sufficient reserve assets to meet customer liabilities.”

Celebrity endorsements

Additionally, the SEC included a warning about crypto asset investments that have been endorsed by celebrities, saying “it is never a good idea to make an investment decision just because someone famous says a product or service is a good investment.”

Notably, the warning about celebrity endorsements comes just a day after eight celebrities, including YouTuber Jake Paul and singer Lindsay Lohan, were charged by the SEC for promoting tokens without disclosing that they were paid to do so.

“A celebrity endorsement does not mean that an investment is appropriate for all investors, or even that it is legitimate,” the SEC wrote.