In what was a brilliant, hilarious, and somewhat childish move, the US Securities and Exchange Commission (SEC) has released a fake Initial Coin Offering (ICO) in order to highlight the risk of fraud within the ICO market. The SEC has long cautioned about the potential for investors to fall prey to fraudulent ICOs, and in their creation of HoweyCoins, they demonstrated this concern in a very tangible way. The fake launch was accompanied by a fake white paper, providing dubious details of the windfalls that investors might expect. Should anyone click on the “Buy Coins Now” button the HoweyCoins website, they will be directed to a page on the SEC site which offers investors tips and educational tools for investing in cryptocurrency and ICOs.
The HoweyCoin is a tongue-in-cheek reference to the Howey Test, which comes from a 1946 Supreme Court Decision in EC v. W.J. Howey Co., where the Supreme Court ruled that a transaction can be considered a security if “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” There is much debate about whether or not ICOs are considered securities, and a crucial tool for determining their status is the Howey Test.
The SEC investor information page linked from the HoweyCoins site informs investors of red flags that will help them discern whether or not the investment is sound or potentially a scam. Red flags mentioned include: Claims of high, guaranteed returns; celebrity endorsements; claims of SEC compliance; investing with a credit card; and pump and dump scams.
High reward investments are often tempting to investors, but they usually carry incredibly high risks, which can often lead to total loss on investments. Guaranteed returns are usually indicators of fraud. Celebrity endorsements do no necessarily mean that an investment is illegitimate, but the SEC cautions that investors should never make a decision to invest based solely on a celebrity’s endorsement of a product or offering. For SEC compliance claims, the SEC cautions that many online trading platforms refer to themselves as “exchanges,” which can give the investor the false impression that they are regulated or that they meet the regulatory standards of a national securities exchange. This is not always the case. The SEC also cautions investors that most licensed and registered investment firms do not allow their customers to use credit cards, and offerings of purchase with a credit card are to be avoided unless registration and licensing can be proven. So-called “pump and dump” schemes involve frenzied increases in the price of stock due to misleading information, followed by a “dump” of stocks by the “fraudsters” who sell their shares at a high rate, after which the stock price generally falls significantly, causing investors to lose money.
The SEC’s launch of their fake cryptocurreny the HoweyCoin comes at the same time as a large cryptocurrency event in New York, CoinDesk’s Consensus 2018. SEC Enforcement Division Cyber Unit Chief Robert Cohen said that the SEC does not want to hinder any innovation around blockchain, which seems to mirror other SEC statements about their approach to regulation of cryptocurrency markets and tokens. Speaking at a panel at the conference, Cohen said, “The SEC has been open about meeting with people from the industry, to come in and meet with the staff, to talk about the ideas you have, the new developments, and have a dialogue about the new technology. The commission encourages ways to raise capital, we don’t regulate the technology — we regulate the financial industry and the markets.”
Earlier this year, SEC Chairman Jay Clayton released a statement informing investors that the SEC and regulators are taking actions to protect them; the statement also addressed the markets and concerns related to cryptocurrencies and other crypto investments. The statement said, “Unfortunately, it is clear that many promoters of ICOs and others participating in the cryptocurrency-related investment markets are not following these laws. The SEC and state securities regulators are pursuing violations, but we again caution you that, if you lose money, there is a substantial risk that our efforts will not result in a recovery of your investment.”
We applaud the SEC for their sense of humor and their novel use of a fraudulent ICO to warn investors about the pitfalls of cryptocurrency investment and educate consumers about the proper components of an ICO.