When it comes to making business decisions, Taylor Swift does her due diligence all too well.
In 2021, the pop superstar was approached by the now-bankrupt crypto exchange FTX about a $100 million sponsorship deal that would have involved selling tickets as non-fungible tokens (NFTs) to her fans, according to the Financial Times.
However, it never materialized.
Before inking the deal, Swift asked FTX representatives a simple question: “Can you tell me that these are not unregistered securities?” Adam Moskowitz, one of the attorneys leading a class-action lawsuit against FTX’s celebrity endorsers, said during an episode of “The Scoop” podcast.
Moskowitz’s lawsuit is seeking over $5 billion in damages, according to the law firm’s website. The lawsuit claims that FTX’s high-profile promoters didn’t properly research FTX before participating in the “offer and sale of unregistered securities in the form of yield-bearing accounts (‘YBAs’).”
Swift was one of only a few celebrities to question the exchange, Moskowitz says on the podcast.
How investors can identify potential scams
In a December complaint, the Securities and Exchange Commission (SEC) alleged that FTX’s native digital token, FTT, fits the agency’s definition of a security because it was offered and sold as an investment contract. The SEC uses the “Howey test” to determine whether something counts as an investment contract, which includes the following criteria:
- There is an investment of money;
- in a common enterprise;
- in which the investor expects a profit; and
- the profit is derived solely from the efforts of others.
It’s against federal law for a company to offer or sell securities unless the offering has been registered with the SEC or an exemption to registration is available, according to the agency’s website. Although many companies raise funds from investors through unregistered offerings, fraudsters may also use them to conduct investment scams, the SEC warns.
Everyday investors can scrutinize unregistered offerings just like Swift by watching out for a number of red flags outlined by the SEC.
1. Claims of high returns with little or no risk
A classic warning sign of fraud is a promise of high returns with little or no risk, the SEC warns. All investments carry some degree of risk and, typically, higher returns come with higher risk. Any investment that claims to have zero risk should make you skeptical, the SEC advises.
2. Unregistered investment professionals
You should always check whether the person trying to sell you an investment is properly registered and licensed to do so, even if you know them, the SEC says.
You can check an investment professional’s background, qualifications and registration through the Investment Adviser Public Disclosure website and the Financial Industry Regulatory Authority’s (FINRA) BrokerCheck website.
3. Problems with sales documents
If a salesperson won’t provide any information about a potential investment in writing, you should probably avoid it. A legitimate private offering will typically be described in a private placement memorandum (PPM), the SEC says.
If you are provided documents, look out for spelling errors or other mistakes that may indicate that a potential investment could be a scam.
Additionally, you can check the license or registration status of an individual or firm by submitting a question to the SEC and can report a problem concerning your investment or possible securities fraud on its website.
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