Legal Question in Business Law in California

Hi LawGuru,

I and a few buddies have been rather successful investing in cryptocurrency (e.g. Bitcoin), even in the short amount of time we've been deeply involved. We are entertaining the thought of a business model as follows:

Clients provide $X to invest. This is an amount that we insure and guarantee they will not lose. (If our investments are poor, we have $X put aside to return to them at the end of the year/allotted time that was agreed.) If our blockfolio management helps them make gains, we take 20% of the profits and they receive 80%. We cash out the investments either at a predetermined number (they might say, "Cash out the moment you make my investment gain up to $50K!") or after a set time frame. We would give them quarterly reports on the performance of their investments. In this way they don't have to constantly be watching and learning about the market, but can simply invest and walk away with absolutely no risk of loss.

We aren't certain if this is legal, though. We're based in USA. We're hesitant not because of the business model itself, but because we're aware that typical hedge fund and portfolio managers need to be licensed; but in that sense, we're talking about official stocks. Is cryptocurrency in that same realm? Does anyone know for sure?

Thanks for any advice you can give.

Asked on 8/09/17, 7:50 pm

1 Answer from Attorneys

Timothy McCormick Haapala, Thompson & Abern, LLP

It absolutely is in the same realm. There are many investment methods for currency speculation and hedging, see, e.g. ALL of them are highly regulated and the same rules apply to cryptocurrencies; they're just not traded on the same platform. So, the model you have absolutely would be highly regulated and would require not only licensing, but also securities regulatory filings and compliance. It is possible for a small enough group of investors to pool their funds and invest together by forming a holding company, with little or no regulatory involvement, if the number of investors is small enough and they are directly involved in the company, but that sounds a lot different from your model, which sounds more like a mutual fund in which people can enter and leave independently of each other and without modifying the underlying business ownership. That is highly regulated at any scale because you are selling securities, not ownership of a small business.

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Answered on 8/10/17, 9:35 am

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