Trading Crypto on Behalf of Others

An individual who receives money from others to conduct crypto trading on their behalf could potentially be considered an investment adviser under Florida Statutes, including Section 517.12.  Section 517.12 of the Florida Statutes, requires dealers and associated persons to be registered with the Office of Financial Regulation (OFR) before selling or offering securities in Florida.

Under Florida law, an investment adviser is generally defined as any person who, for compensation, engages in the business of advising others on the value of securities or the advisability of investing in, purchasing, or selling securities. This would include:

• Managing a person's funds for the purpose of investing in securities, which may include certain types of cryptocurrencies if deemed securities.
• Providing advice on investments, including buying and selling securities, for a fee or compensation.

The key question is whether the specific cryptocurrency being traded qualifies as a security under Florida law, which generally follows the federal definition of a security. Some cryptocurrencies, particularly those offered in Initial Coin Offerings (ICOs) or other investment schemes, have been deemed securities by the Securities and Exchange Commission (SEC) and may also be treated as securities by Florida regulators.

Factors to Consider:

1. Nature of the Cryptocurrency:

• Cryptocurrencies like Bitcoin and Ethereum have generally not been classified as securities by the SEC.
• However, certain tokens or coins involved in investment contracts (such as ICOs) can be classified as securities under the Howey Test, which Florida follows. The Howey Test defines a security as an investment of money in a common enterprise with the expectation of profits from the efforts of others.

    2. Role of the Individual:

• If the individual is managing funds with the promise of generating profits through cryptocurrency trading, and the cryptocurrencies are considered securities, they could be required to register as an investment adviser under Section 517.12.

    3. Compensation:

• If the individual receives compensation for managing these crypto investments, it strengthens the likelihood that they would need to register as an investment adviser.

Consequences of Not Registering:

If the cryptocurrencies being traded are deemed securities, and the individual is acting as an unregistered investment adviser, they would be in violation of Section 517.12 of the Florida Statute, which mandates registration. This can lead to several serious consequences, including:

1. Civil Penalties:

• Fines: The Florida Office of Financial Regulation may impose civil penalties. For each violation, the OFR may issue fines up to $10,000 per infraction.
• Restitution: A violator may be required to compensate investors for losses caused by unlawful transactions.

    2. Criminal Penalties:

• Violating this statute is a third-degree felony under Florida law. This carries potential penalties of up to:
• 5 years in prison;
• 5 years of probation;
• $5,000 fine.

    3. Civil Liability to Investors:

• Investors may have grounds to sue for rescission (cancellation) of the securities purchase or for damages. This is based on Section 517.211, which allows investors to recover their investments plus interest if securities were sold unlawfully.

    4. Federal Consequences:

• Because securities regulation often involves both state and federal law, violating Florida's registration requirements might also trigger scrutiny or penalties from the Securities and Exchange Commission (SEC) under federal securities laws such as the Investment Advisers Act of 1940, which has more severe penalties than the state law.

Thus, if the cryptocurrencies involved are considered securities, the individual conducting the crypto trading for others is likely to be considered an investment adviser and would need to register with the Florida Office of Financial Regulation to comply with state law. If, to the contrary, the cryptocurrency is not considered securities, the individual conducting crypto trading for others may still incur in other potential liabilities under other laws. To ensure compliance with legal requirements when managing or investing funds on behalf of others, it is important to consult with an experienced attorney in this area. Tamarisk Law Firm, based in Fort Lauderdale, provides representation for business litigation and other legal matters throughout South Florida. Please note that this article is for informational purposes only and does not constitute legal advice specific to any individual situation.