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When it comes to making business decisions, Taylor Swift does her due diligence all too well.
In 2021, the pop superstar was approached by now-bankrupt crypto exchange FTX over 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 Swift signed the deal, he asked FTX representatives a simple question: “Can you tell me 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 podcast The Scoop.
According to the law firm’s website, Moskowitz is seeking over $5 billion in damages in his lawsuit. The lawsuit alleges that FTX’s high-profile promoters failed to properly research FTX before engaging in the “offering and sale of unregistered securities in the form of income-bearing accounts (‘YBAs’)”.
Swift was one of the few celebrities to question the exchange, Moskowitz says on the podcast.
In a December complaint, the Securities and Exchange Commission (SEC) claimed that FTX’s native digital token, FTT, met 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 qualifies as an investment contract, which includes the following criteria:
According to the agency’s website, it violates federal law for a company to offer or sell securities unless the offering has been registered with the SEC or an exemption from registration is available. Although many companies raise funds from investors through unregistered offerings, scammers can also use them for investment fraud, the SEC warns.
Daily investors can scrutinize unregistered offerings just like Swift does by looking for a series of red flags outlined by the SEC.
1. Claims for high returns with little or no risk
A classic scam red flag is the promise of high returns with little or no risk, the SEC warns. All investments come with some degree of risk, and higher returns tend to come with higher risk. Any investment that claims no risk should make you skeptical, the SEC advises.
2. Unregistered Professional Investors
You should always check that the person trying to sell you an investment is properly registered and licensed, even if you know them, the SEC says.
You can verify an investment adviser’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 seller doesn’t provide written information about a potential investment, you should probably avoid doing so. A legitimate private offering is usually outlined in a private placement memorandum (PPM), the SEC says.
If documents are provided to you, be on the lookout for misspellings or other errors that may indicate a potential investment may be a scam.
In addition, you can verify an individual’s or entity’s license or registration status by filing a question with the SEC and reporting an issue regarding your investment or possible securities fraud on their website.
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