What’s in a security? That which we call a token / By any other name would smell as sweet.

That’s been one of the central debates surrounding cryptocurrency in recent years: Which digital assets are securities, and which fall outside the Securities and Exchange Commission’s jurisdiction? Congress is still hashing out many of those details in the Clarity Act, but the SEC is moving ahead with its own framework.

This week, the SEC proposed new rules that would create exemptions for certain crypto issuers to raise capital without registering their offerings, while providing a potential path for some tokens to eventually fall outside federal securities laws. The crypto industry is viewing the proposal as a win. “[It’s] an important step toward the clear, fit-for-purpose rules digital asset markets in the United States have needed for years,” Blockchain Association CEO Summer Mersinger said.

What the SEC Is Proposing

The current SEC has made championing crypto one of its main priorities in an effort to reverse course from the last administration, which was criticized for “regulation by enforcement.” Its new proposal largely comes down to providing insight on two questions: When do securities laws apply to crypto, and how can issuers raise capital without facing the same requirements as traditional securities? If adopted:

• Certain crypto startups could raise up to $5 million over four years without registering the offering.
• Other issuers could raise up to $75 million in any 12-month period, although they would face additional disclosure and ongoing reporting requirements.

Golden Years. The proposal would also create a safe harbor that could allow a token to eventually fall outside the securities laws if certain conditions are met. Essentially, the issuer would need to show that its blockchain has become sufficiently independent that it no longer relies on the issuer’s ongoing managerial efforts.

Think of it as a transition from a product to a commodity. People don’t invest in gold because a company is working to make it successful. They invest in gold because the asset itself has value.

Does crypto have intrinsic value? Well … that’s another story.

What are the chances the Mets win the World Series this year? Probably about the same as the odds that sports betting will lead to long-term financial success. So, pretty low.

Still, one in eight investors say they treat sports betting as a deliberate part of their long-term strategy, including more than 25% of Gen Z investors and 14% of millennials, according to a recent Betterment survey. And it’s only getting more popular: The industry has grown from about $400 million in 2018 to nearly $17 billion today. While gambling may not be a sustainable plan for building long-term wealth, advisors can help clients scratch that itch in a way that doesn’t threaten their overall financial security.

Stoy Hall, a CFP and founder of Black Mammoth, said that he recommends clients allocate 1% or 2% of their portfolio to “fun money,” which could include sports betting. “If they hit it big, fantastic, then we can implement the rest of the plan. But if not, then it’s not going to tank them,” said Hall. If more advisors took this approach, “then we wouldn’t have to worry about them going in a deep hole and becoming in debt out their ears.”

Trade Season

Sports betting has grown much easier to access, and the sleek tech platforms and financial language have added a veneer of legitimacy, said Clifford Cornell, an advisor at Bone Fide Wealth. “There’s a subtle psychological change in people’s minds when they think ‘I’m buying five contracts on the Mets’ versus ‘I took the Mets money line,’” Cornell said. “One makes it seem like I’m trading some complex financial instrument, and the other is outright gambling.”

According to the survey:

• 52% of Gen Z respondents said they have redirected money meant for investing into sports betting, including 14% who said they do so multiple times a month.
• Only about a third of Gen Z investors said they don’t engage in sports betting at all.

But Cornell was skeptical that the money redirected away from investing was actually meant for long-term holdings, as about a quarter of young men are day trading. “It was gambling to begin with,” he said. “It’s just changing form.”

The Odds Are Stacked Against Us. Younger generations are more likely to feel distrustful about the traditional avenues of wealth building, which may explain their turn toward sports betting, said Andrew Herzog, a CFP at the Watchman Group. “Millennials have seen the Great Recession, COVID turmoil, and geopolitical chaos in their adult lives — wrench after wrench in the works,” he said. “So they turn to alternatives, and particularly, things that they already know and understand.”

Family offices are big on DIY.

Just over 92% of family offices newly identified by FINTRX in the second quarter said they were most interested in direct investments. By comparison, just 10% said they were focused on hedge funds, versus nearly 40% of the broader FINTRX database mapping private wealth. The numbers suggest that newly established or identified family offices are showing a particularly strong appetite for investing directly in companies and other assets, rather than relying primarily on external fund managers.

“They’re working with families that made their own wealth from founding a business or from sports or movies,” said Patrick Galvin, FINTRX research associate and author of the report. “Because they made their own wealth, they trend toward the direct investment space.”

Over the Hedge

It’s not that family offices are necessarily souring on hedge funds, but rather that many are seeing more benefits in direct investing. “[It] offers a more legible proposition because the family can see the asset, the operator and the path to value creation,” said Ryan Austin, CEO of Arondight Advisors. He added that family offices are becoming more selective, and the exclusivity of hedge funds isn’t as desirable as it once was. “A hedge fund manager can no longer sell the category,” he told Advisor Upside. “It has to earn the mandate, strategy by strategy.”

The report also found:

• Almost 70% of newly classified offices are entrepreneurial, meaning the clients’ wealth was generated through founding, building or selling a business.
• FINTRX added almost 40 US-based family offices to its database in the second quarter, with a third coming from California and Florida.

“This represents the new age of wealth and these modern hubs like San Francisco, Silicon Valley and Miami,” Galvin said, adding that tech and real estate are the sectors where most of these families are generating their new wealth.