The U.S. Securities and Exchange Commission’s Office of investor Education and Advocacy recently published a new Investor Alert focused on risks associated with unregulated self-directed Individual Retirement Accounts. The alert advised investors to be cautious when dealing with this type of IRA, citing “unique risks” that include potential investment in digital assets like cryptocurrency:
“Certain self-directed IRAs allow investment in so-called “digital assets,” which include crypto-currencies, coins, and tokens, such as those offered in so-called initial coin offerings (ICOs). Fraudsters may use the allure associated with ICOs and other digital assets to entice self-directed IRA investors with the promise of high returns.”
The SEC alert acknowledged that digital currencies “may provide fair and lawful investment opportunities.” However, it noted that these digital assets may be “conducted without SEC registration or a valid exemption from registration,” and said that there might not be enough accurate information available to help most investors make sound decisions.
Of course, cryptocurrencies were not the only risks mentioned. Investors who rely on self-directed IRAs were also advised to be aware of risks associated with disclosure issues, a lack of liquidity, and potential fraud:
“A self-directed IRA is an IRA held by a custodian that allows investment in a broader set of assets than is permitted by most IRA custodians. Custodians for self-directed IRAs disclaim most duties to investors, and may allow investors to invest retirement funds in “alternative assets” such as real estate, promissory notes, tax lien certificates, and private placement securities. Investments in these kinds of assets may have unique risks that investors should consider. Those risks can include a lack of disclosure and liquidity -- as well as the risk of fraud.”
The SEC’s Lori Schock told CNBC that the new warning was not prompted by any single event, but rather a desire to ensure that investors were aware of new and emerging risks:
"Now that some self-directed IRAs include digital assets — cryptocurrencies, coins and tokens, such as those offered in so-called initial coin offerings — we think it is important to alert investors about the potential risks and fraud involved with these kinds of investments that may not be registered."