FINRA’s First Disciplinary Action Involving a Cryptocurrency Serves as a Cautionary Tale for Investors

By Theodore O’Brien

The Financial Industry Regulatory Authority (FINRA) ushered in a new era of securities regulation by filing a complaint against a Massachusetts man, charging him with fraud and the unlawful distribution of unregistered cryptocurrency securities.

Cryptocurrencies like Ripple and Ether have captured the popular imagination because the underlying blockchain technology allows users to exchange payments without involving a third party, like a bank, potentially making transactions more efficient and more secure. While regulators have cautioned investors about the risks of cryptocurrencies, the problem lies not with the technology itself, but rather when a cryptocurrency is offered as an unregistered security.

The complaint, brought by FINRA’s Department of Enforcement against Timothy Ayre, illustrates how an individual may take advantage of the public’s interest in cryptocurrency to bail out a failing business, violating securities laws in the process. In 2015, Ayre bought the rights to HempCoin, a cryptocurrency, and promised investors that by purchasing the coins they were also acquiring common stock in Rocky Mountain Ayre (“RMTN”), a failing public company with no real assets. Ayre told investors that every 10 HempCoins was backed by 1 share in RMTN, the public company. However, HempCoin was never registered as a security and, therefore, Ayre violated securities laws by attaching an equity interest in a public company to HempCoin. Ayre misled investors with statements describing HempCoin as “the world’s first currency to represent equity ownership” so that investors would mine and purchase HempCoins thinking they the coins were backed by a publicly-traded company. To make matters worse, Ayre attracted investors with allegedly false statements about RMTN’s business; he suggested it was a healthy diversified financial planning company, when in reality RMTN was a holding company with no underlying business.

The problem, of course, is that Ayre failed to register the new security and ran afoul of several securities laws and regulations by offering an unregistered security to the public. Under Section 5 of the Securities Act of 1933, it is illegal to sell an unregistered security. Ayre needed to either register HempCoin securities with the Securities and Exchange Commission or satisfy an exemption from registration. He did neither and in the course of selling the HempCoins as securities to investors he made materially false statements and omissions regarding both the purported security and RMNT. According to the complaint, this fraudulent conduct violated Section 10(b) of the Securities Exchange Act of 1934 and FINRA Rules 2010 and 2020. Finally, the complaint alleges that Ayre executed transactions involving more than 500 million shares of RMNT stock and yet failed to disclose those transactions to his broker-dealer, violating FINRA Rule 2010, NASD Rule 3040, and FINRA Rule 3280.

In spite of HempCoin’s status as an unregistered security, cryptocurrency investors “mined” more than 81 million HempCoins from June 2015 until at least late 2017. Other investors purchased the coins on cryptocurrency exchanges like C-Cex and Yobit.

It is important to note, as FINRA states in the press release:

“The issuance of a disciplinary complaint represents the initiation of a formal proceeding by FINRA in which findings as to the allegations in the complaint have not been made, and does not represent a decision as to any of the allegations contained in the complaint. Under FINRA rules, a firm or individual named in a complaint can file a response and request a hearing before a FINRA disciplinary panel.”

This complaint is remarkable because it is FINRA’s first disciplinary action involving cryptocurrency. It is also an important reminder to investors to be wary of unregistered securities. FINRA has specifically cautioned investors about cryptocurrency-related schemes. Although cryptocurrency represents an exciting new technology, investors should not be so caught up in the potential that they fail to exercise due diligence and conduct investment research.

As this blog noted earlier this year, cryptocurrencies pose unique risks to unsophisticated investors because regulators have been slow to catch up with the emerging technology (and related scams).

Impact of Technology on the Financial Market

By Selene C. Vazquez

The New York Stock Exchange and other exchanges have long been depicted as a “pit” where traders yell out orders at each other. This scene is portrayed as busy, loud, and hectic. However, the 125-year tradition ended in 2015. Today, much of the trading goes on without shouting (only few remain open, such as the S&P 500 Futures Market which remains open in the Chicago trading floor).  Rather, transactions are now governed more by software and computers and less by people. This shift in technology is affecting tens of trillions of dollars globally and deserves attention.

Technology Facilitates Information and Interaction

Technology has opened the door to an unlimited amount of information, increased interaction, and a more direct access to economic agents. Today, investors have an unprecedented access to current stock prices, earning reports, and any important news on stocks and their companies. This has led to more efficient, better-informed investors, traders, and advisers.

Simply put, the evaluation of stock has become easier. Investors can know price, details, and access any necessary analyst’s report within seconds. Technology has also fostered a larger volume of interaction through multi-party live discussion of the financial market, the use of electronic mail, and the ability to exchange stocks rapidly across national, state, and local borders, among other things.

Speed and Changes Pose Concerns

For some, technological advantages and the unprecedented access to the free flow of information are great benefits for the industry. While for others, these trading changes and new speeds bring grave concern.

For example, high-tech trading threatens firms, exchanges, and current stock mechanisms that have long been protected from intense competition behind borders, geographic location, and regulatory rules. Additionally, the speed of technology and quick access to information via social media and news outlets has the power to affect the market within a matter of seconds. Take for instance, Elon Musk’s comments via Twitter, the media coverage it received, and the impact it had on Tesla’s stocks and the financial market. Another more recent example, is the developing coverage of Uber’s request to the SEC for rules changes that would let it provide company stock to its drivers.

Moreover, the trading speed from algorithms also brings some concern. Computer-generated trading programs are designed to automatically sell when prices start going down and then buy when they fall. This occurs at the rate of thousands per minute, and may be of worry because regulatory agencies are not prepared to contain the risks of the new mix of algorithmic and high-frequency trading should these programs break down. Historically, agencies have focused on reactive measures, such as preventing a previous financial crisis, rather than proactive measures.

Too much has changed too quickly to fully understand the interplay of the technological advances and the financial market. While technological uses are becoming more prominent and their future impact is still unanticipated, the changes technology brings must be noted as it impacts millions of people and trillions of dollars.


Avoiding Surrender at All Costs: Ensuring a Variable Annuity is Suitable for You

By Ryan Yaffa

What is a variable annuity anyways? A variable annuity is a contract between an investor and an insurance company, under which the insurer agrees to make periodic payments to the investor, either immediately or at some specified point in the future. An investor purchases an annuity contract either by making a single sum payment or a series of periodic payments.

Generally, annuities are structured as either fixed or variable. Fixed Annuities provide fixed payments to the owner over time. Conversely, Variable Annuities allow the investor to receive higher future cash flows contingent on the performance of the investments that comprise the annuity. While Variable Annuities come with more risk, the products can potentially allow the annuitant to reap high returns. A Variable Annuity offers a wide range of investment options such as mutual funds, bonds, stocks, and money market instruments.

Before deciding to purchase an annuity there are important considerations for potential annuitants. First, annuities are illiquid. Deposits into annuity contracts are typically locked up for a period of time, and cannot be recovered by the owner. This period is generally called the surrender period. During this time, if the owner wants to withdraw any of the money, they will be subject to a surrender charge, where the penalties can be steep. Surrender periods can last anywhere from two to ten years and the penalties can be as high as 10%. These charges will reduce the value of the account, as well as the return on your investment. Annuitants can however, add features such as riders to the annuity contract at an extra cost, that will allow them to function as fixed-variable annuities.

Who Should Buy Annuities?

Generally, annuities are most suitable for individuals seeking stable, assured, retirement income. For most individuals, it makes more sense to invest their savings into retirement accounts, such as a 401k or IRA.  Such products are not recommended for younger individuals, especially because of the illiquidity issues and the associated withdrawal fees. It is important to note that the intended purpose of such contracts is not to cash out the annuity for a profit at a later date. The purchaser is merely trading a liquid lump sum in exchange for a guaranteed series of cash flows.


Variable Annuities are complex and offer a variety of features, which can be confusing for potential investors. Thus, it’s imperative that investors make sure they fully understand the terms associated with the annuity before purchasing. That is why potential annuitants should carefully read the prospectus and have their broker explain all of the terms.

While variable annuities can be a great investment instrument under the correct circumstances, there are drawbacks associated. As with all investments, be sure to do your homework, because SURRENDERING is always expensive.