By Kevin Fish

Binary options are a simple yes or no proposition, hence the name “binary” option; and the proposition is: Will the underlying asset be at a certain price at a certain time?  A binary call option is a prediction that the underlying asset will increase and a binary put is a prediction that the underlying asset will decrease.

For example, if underlying stock XYZ was trading at 2,300 and I believed that by the close of the trading day, XYZ would be above 2,310, I might take out a binary call option.  If the underlying stock is at or above that price at the end of the trading day (expiration period), I would make a 100% return.  However, if the price is below at the expiration period, then I lose 100% of my investment.  Therefore, the average return on investment for this binary option is zero.

Although the average return on investment should be zero, many binary option offerings are a net loss for investors.  The payout is much smaller than the loss on most binary options. For example, you purchase a binary option for $60, you may stand to win $30 but lose all $60. Online binary option trading platforms will often advertise a higher average return on investment than a customer would expect to hide the fact that the average customer can expect a net loss.

Retail investors are mostly purchasing binary options through these online trading platforms, like Binary Cent, Binary Mate, 24 Option, etc.  These platforms require the investor to deposit a sum of money to purchase the option.  If the investor chooses the wrong proposition, then the option expires out of the money and the platform takes all the investor’s deposit with no refund.

Binary options existed for many years, however before 2008 they were only available to large institutional traders and high net-worth individuals through the over-the-counter market.  In 2007, the Options Clearing Commission recommended changes in binary options to make them more available to retail traders.  In 2008, the SEC approved the offering of binary options as tradeable investment instruments.  Not long after, the Chicago Board Options Exchange and the American Stock Exchange began offering binary options for public trading.

Since binary options were made available to retail investors in 2008, they have proven to be problematic.  Retail investors have lodged many complaints for fraudulent activity against the internet platforms that trade binary options  and the SEC issued an investor alert on binary options in November of 2016.

The SEC has quickly pumped the brakes on this new investment instrument to retail traders with the advent of numerous instances of fraudulent activity by online trading platforms in connection with trading binary options.  While some binary options are listed on registered exchanges, most binary options are listed through online trading platforms.  These trading platforms do not necessarily comply with US regulations.  The fraud associated with these trading platforms fall into three categories: (1) refusal to credit customer accounts or reimburse funds to customers when the customer tries to withdraw money; (2) identify theft; and (3) manipulation of software to affect whether trades win or lose.

Investors must be cautious of the online trading platforms that offer binary options.  The online platforms are unregistered and are not licensed to provide investment advice, and therefore investors who use the platforms may not receive the protections of the federal securities and commodities laws.

By Harshan Shanthakumar

There is a new type of savings account on the financial market and it’s one you should be “ABLE” to figure out. The federal ABLE Act, which was passed in 2014, made way for individuals with disabilities and their families to set aside $14,000 a year to be used for disability-related costs, including living expenses. ABLE stands for Achieving a Better Life Experience. An ABLE account provides a tax-advantaged method to save for disability-related expenses. The ABLE Act limits eligibility to individuals with significant disabilities with an age of onset of disability before turning 26 years of age.

An ABLE account serves an important purpose in respect to the Investor Rights Clinic’s mission of representing under-served investors (particularly senior citizens): ABLE accounts help supplement individuals with disabilities and their families without losing the public benefits of SSI, Medicaid, and/or SNAP. Prior to this act, disabled individuals would lose out on these public program benefits in circumstances where they reported more than $2,000 in cash savings, retirement funds, and other items of significant value. The ABLE Act recognizes the extra, significant costs of living with a disability and does not affect eligibility for SSI, Medicaid, and other public benefits.

The ABLE Account is a great option to diversify your savings account vehicles; however, there are certain financial considerations to be aware of. Contributions to an ABLE Account are not tax deductible for federal income tax purposes but your investments can grow tax free and remain so when withdrawn and used for disability-related expenses. In addition, it is important to consider the fees and expenses; ABLE programs may charge account maintenance, asset management, or performance fees. Fortunately for Florida residents, there is no minimum dollar amount to open an ABLE account and no annual fee. Florida ABLE United is the program website for Florida residents. It is important to note that there are only 3 portfolio options: Vanguard, Florida PRIME, and Blackrock. If a broker-dealer suggests that you invest in an ABLE account and the account is not affiliated with either of the above 3 institutions, ask questions and remain cautious. Below is a list of questions that are helpful if you are considering opening an ABLE account:

• What fees are charged by the plan?
• Under what circumstances does the plan waive or reduce certain fees?
• What is the minimum amount needed to open an account under the plan and what is the minimum for subsequent contributions?
• Does the plan offer withdrawal methods such as checks, a debit card, or a recurring prescheduled withdrawal? What restrictions or fees apply to withdrawals?
• What types of investment or savings options are offered by the plan? How long are contributions held before being invested or available for withdrawal?
• Does my state’s plan offer tax advantages or other benefits for investment in the plan it sponsors?
• How have investment options under the plan performed in the past, knowing that historical results are not indicative of future performance?

By Jake Altobello

With the proliferation of cryptocurrencies within the past year, “bitcoin”, “etherium” and “litecoin” have become buzz words synonymous with rapid gains of wealth. However, the level of risks associated with such “investments” poses significant risks for the traditional investor. Due to the fact that cryptocurrencies are not being backed by any governmental body, regulatory schemes have largely been absent as the trend of investors gravitating towards cryptocurrencies has increased. What is essential to understand when looking at these “investments” is just how fast one can gain or lose wealth. In the nine-year history of Bitcoin, it has seen five peak-to-trough declines of more than 70%. As recent as December 2017, Bitcoin was trading at a price of nearly $19,783 per coin. However, in the new year Bitcoin is already down roughly 60%, trading at around $7,000. These sharp swings illustrate how illiquid and volatile digital currencies are in relation to its stock, bond or currency counterparts.

How then, do FINRA and other regulatory schemes protect unsophisticated investors who believe cryptocurrencies offer a “get-rich-quick” opportunity? While most regulatory schemes are premised on transparency, investor protection and market integrity, there is little activity surrounding cryptocurrencies that complies with this regulatory approach.  FINRA’s 2018 Regulatory and Examination Priorities Letter, released in early January, highlights the focus FINRA now is placing on cryptocurrencies. Along with this regulatory report, FINRA has also updated their website with warnings regarding cryptocurrencies, informing investors to be wary of the promise of unrealistic gains.  Furthermore, FINRA issued an alert to warn investors to be cautious when considering the purchase of shares of companies that tout the potential of high returns associated with cryptocurrency-related activities without the business fundamentals and transparent financial reporting to back up such claims. One of the ways FINRA is attempting to regulate this newly emerging investment opportunity is through deepening their understanding of broker-dealer’s involvement with initial coin offerings (ICO). Specifically, FINRA is tasking themselves with identifying high-risk firms and brokers, as well as applying pressure on firms to have stronger supervisory practices. Additionally, they intend to review cryptocurrencies that operate as securities. In doing so, their goal is to ensure firms have put mechanisms in to place comply with federal securities laws and regulations, as well as FINRA rules.

These proposed solutions by FINRA are easier said than done, however, meaning many investors must be wary of these products being offered by their brokers. Due to the way in which cryptocurrencies are exchanged, they ambiguously skate the line between currency and securities. Because the SEC does not have direct oversight of currency transactions, the ambiguous characterization of cryptocurrencies leaves regulators in a tough position to regulate them effectively. However, while the SEC may not have regulatory oversight for currency exchanges, they still have investigatory powers. By having these investigatory powers, as well as FINRA protecting the traditional investor, consumers have some level of protection. It remains to be seen if the protections currently available are adequate though.

By Vanessa Rousso

Cryptocurrency—a concept that, despite its recent popularity, remains obscure and enigmatic to the vast majority—might as well have been called cryptic currency. Indeed, Investopedia defines cryptocurrency as, “a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.”

However, this definition glosses over one of the major risks inherent in a currency that—through immunity to government interference—is largely unregulated (and thus unable to protect consumers with quality-control standards, regulations to avoid pump-and-dump schemes, and measures to protect from outright fraud).  Furthermore, while this definition also points out that this currency is difficult to counterfeit, it fails to highlight the countervailing factor that cryptocurrencies remain highly vulnerable to theft from hackers (most recently, one of Japan’s largest cryptocurrency exchanges has revealed that it’s lost nearly $400 million in a security breach).

Although, the “world of virtual currencies is getting very crowded with so-called altcoins,” the undisputed market leader is, by a wide margin, ‘Bitcoin’—which is the subject of another blog and can be read here: Investors Must Be Wary of Bitcoin Schemes.  Ultimately, love them or hate them, cryptocurrencies are here to stay.

The ICO

Those wanting to jump into the cryptocurrency game, found themselves in need of a way to raise funds for their ventures while remaining free from regulation—and so the Initial Coin Offering (“ICO”) was born.  Investopedia explains, “An Initial Coin Offering (ICO) is used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, but usually for Bitcoin.”

An ICO is more easily understood as a hybrid between IPOs and crowdfunding. Like IPOs, ICOs allow people to acquire instruments of value—coins or tokens are issued during an ICOs (versus stock in an IPO)—that are then traded, used, spent, or exchanged.  What makes the ICO stand apart from the IPO is that, “literally anyone” can launch one—and that is where the crowdfunding element comes in.

With startups raising as much as “$200 million in one go,” ICOs are experiencing tremendous growth—among those looking to fundraise and those seeking to invest.  However, the corresponding lack of regulation is alarming as ICOs are launched without “regulatory oversight, some without even a workable minimum viable product, without any financial statements or evidence that their company even exists.”

Ultimately, investors remain largely unprotected as they pour millions into ICOs and cryptocurrencies.  With so much at stake, so little transparency, and such utter lack of regulation, the environment is ripe for fraud and criminal activity—and investors will be paying the price.