By: Jean-Pierre Bado

Our office was abuzz earlier this week as one of our colleagues reminisced about his trip to Tampa to attend Taylor Swift’s latest show. Our colleague—whom we will not identify as we strive to protect the innocent—would not stop raving about the lyrics! The dancing! The costumes! Clearly, Taylor’s show has something to offer fans of any age.

But the most impressive Taylor news to come out this week did not relate to her a-may-zing show. Instead, it involved the fallen cryptocurrency exchange, FTX.  Multiple news outlets reported the news that Taylor, (Ms. Swift if you’re nasty), was in talks with FTX about a $100 million endorsement deal that including selling NFTs.  These reports indicate that Taylor—whose father was a long-time investment banker and whose mother marketed mutual funds—asked FTX one question: Are these unregistered securities?

That one question killed any chance of a deal.  Why?  Because that’s the type of question a person asks when: (1) they already know the answer and (2) the answer is bad—really bad.

Unregistered securities are, according to every federal and state regulator, at best a knotty investment that only sophisticated investors should consider owning.  Even then, those sophisticates, known in the industry as “accredited investors,” can expect to receive a contract that is hundreds of pages long, explaining the risks that could potentially gut the entirety of their investment.  Despite those disclosures, lawsuits are common precisely because of the heightened risk of loss.  Unregistered securities can, under certain circumstances, be housed outside the U.S.—so long as they are not sold or marketed to U.S. investors. Like the Bahamas-based FTX, these offshore securities offer a staggering lack of transparency and disclosure.  Generally, the sales pitch will boil down to: (1) everyone who has them is already making millions and (2) you can, too—if you act quickly.

For Ms. Swift, there was considerable risk endorsing an offshore, unregistered security.  Securities laws can create liability not only for the person/entity behind the security itself (in FTX’s case, Sam Bankman-Fried), but also for the platform or exchange that carries it and for anyone who sells or promotes it.  This is why the public is now hearing about an increasing number of influencers who have been accused of running afoul of the law. From investment and legal standpoints, both securities professionals and investors should take great care before becoming involved with unregistered securities, even if the investment is here in the U.S. and the sellers are claiming an “exemption” from registration.  But if it involves an offshore broker or broker-dealer… 

Reports indicate that Ms. Swift was diligent enough to seek legal counsel when negotiating that deal.  That small, but critical detail saved her from being subjected to a $100 million lawsuit from those now seeking to make FTX investors whole. Anyone looking to become involved in the sale or promotion of an unregistered security should – as Taylor did – seek the advice of counsel. If that is you or someone you know, please feel free to give us a call.

Jean-Pierre Bado is an associate with the law firm of Fridman Fels & Soto, PLLC and a member of the firm’s Securities Litigation and SEC Enforcement Practice Group. The Group is led by partner Alejandro Soto, a former senior official with the SEC.