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New York Times columnist Paul Krugman wrote about crypto currency markets and investing in his column, How Crypto Became the New Subprime. Whether you are a crypto skeptic or advocate, the column draws an interesting comparison between the crypto craze today and the subprime mortgage crisis from a few years ago. Mr. Krugman points out, as data on Tradingview.com (Crypto Market Cap and DeFi Market Cap Charts — TradingView) shows, the market cap of cryptocurrencies reached $3 trillion in November 2021. He cites a survey that 55% of crypto investors do not have a college degree. This data point alone does not mean that the majority of crypto investors are unsophisticated, but an investor’s background can be an important factor when evaluating suitability.

According to Mr. Krugman, the promotion of crypto today looks at least somewhat like subprime lending a few years ago. Much like crypto is marketed as a way to expand the pool of people who invest, subprime lending was promoted as expanding the pool of potential homebuyers. The subprime mortgage bubble burst, leading to foreclosures, credit problems, and worse. In the bubble’s aftermath, it was clear that predatory lending was behind some of the subprime loans. Similarly, Mr. Krugman is skeptical that most crypto investors understand what they are buying and have the means to suffer losses.

Crypto markets are lightly regulated, if at all. And investors can be defrauded or taken advantage of in even regulated markets. We have seen investors, both large and small, who have suffered material losses after they were convinced to buy cryptocurrencies or trade even more complex financial products that relate to cryptocurrencies. Whether you agree with Mr. Krugman or not, his point that investors should understand what they are investing in is an important one.

In an article about insider stock sales at publicly traded companies, the Wall Street Journal reported that the father of the CEO of Carvana, an online car dealer, sold $3.6 billion in company stock since October. Much of the sales took place while Carvana was losing money. The WSJ reported that Carvana had net losses of around half a billion dollars over the past six quarters and only reported its first quarterly profit in spring 2021. The WSJ’s article is available here.

According to the WSJ, Carvana’s ownership structure allows the family that founded the company to sell billions of dollar worth of stock but at the same time keep control. Like many other publicly traded companies, Carvana has different share classes—one available to certain insiders and another available to the public. The WSJ explained that each share held by Carvana’s CEO’s family counts for 10 votes, while each share held by members of the public is worth only one vote. Even after $3.6 billion in sales, the WSJ explained, Carvana’s CEO and his father still control more than 85% of all the voting shares.

The WSJ also reported that the CEO’s father sold the shares under what is known as a 10b5-1 plan. Often used by insiders, these plans are designed to purportedly prevent insiders from making trading decisions based on nonpublic information by automating the insider’s sale of company stock. Rule 10b5-1 creates an affirmative defense to insider trading, so long as the automated trading plan is adopted in good faith and at a time the insider does not possess material nonpublic information. Perhaps contrary to the intent of these plans, the WSJ reported that Carvana’s CEO’s father modified the plan twice over six months, while selling hundreds of millions of dollars worth of stock.

In a June 7, 2021 speech, SEC Chair Gary Gensler expressed concern about potential abuses of 10b5-1 plans. The speech can be found here. Chair Gensler said he asked SEC staff to consider “how we might freshen up Rule 10b5-1.” He raised the issue again on September 14, 2021, in testimony before the United States Senate Committee on Banking, Housing, and Urban Affairs. Chair Gensler told the committee that he asked SEC staff to recommend ways to tighten and modernize the rule “and fill perceived gaps in our insider trading regime.”