One in Five ICOs Uses Fraudulent Tactics, WSJ Investigation Shows

An analysis of 1,450 coin offerings reveals 271 companies used rampant plagiarism, identity theft and promises of guaranteed returns to lure investors

by Deyana Laguna
18 May • 2.5 min
In News

Nearly one in five firms raising money via Initial Coin Offerings (ICO) is using “deceptive or even fraudulent tactics” to attract investors, according to a Wall Street Journal investigation.

The media reported on Thursday it had reviewed documents for 1,450 ICOs — a number believed to include most of the projects aimed at an English-speaking audience since 2014. In 271 of the investigated coin offerings, the WSJ identified red flags, such as plagiarized investor documents, promises of guaranteed returns without risk, missing or fake information about the issuing company’s location and leadership.

Of the 1,450 whitepapers downloaded from three popular websites that track ICOs, the WSJ found 111 that repeated entire sections from other whitepapers. The copied wording included mission statements, team biographies and the projects’ technical specifics.

Those dicey 271 companies represent investments of more than USD 1 billion, transaction records and company statements have shown. Investors have so far claimed losses of up to USD 273 million in these projects. The WSJ further warned that while some of the firms have been closed, others are still raising funds.



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Increased Regulatory Scrutiny

In February, the US Securities and Exchange Commission (SEC) issued warnings to investors that many deals in the booming private market for cryptocurrencies could be violating securities laws. The agency revealed at the time that it had filed four separate cases involving alleged ICO fraud this year, with at least a dozen companies backing away from their projects when questioned by the regulator.

On Wednesday, the SEC launched a website touting a fake ICO, illustrating the signs of fraudulent token sales. The website, HoweyCoins.com, featured several of the enticements that are common to fraudulent offerings, including a whitepaper with a complex yet vague explanation of the investment opportunity, promises of guaranteed returns, and a countdown clock that shows time is quickly running out on the deal of a lifetime.

SEC Chairman Jay Clayton said in a statement:The rapid growth of the ‘ICO’ market, and its widespread promotion as a new investment opportunity, has provided fertile ground for bad actors to take advantage of our Main Street investors. We embrace new technologies, but we also want investors to see what fraud looks like, so we built this educational site with many of the classic warning signs of fraud.”

Clayton admitted that distributed ledger technology (DLT) can add efficiency to the capital raising process, but ICO promoters and issuers need to make sure they follow the securities laws, while investors should do their diligence before trusting firms with their money.