US SEC Teaches Investors Lesson with Fake ICO

The US financial watchdog seeks to educate investors about the risks associated with ICOs.

by Marin Marinov
18 May • 3 min
In Regulation

The US Securities and Exchange Commission (SEC) has launched a fake Initial Coin Offering (ICO), dubbed HoweyCoins, which aims to educate individual investors about the perils of participating in this form of fundraising. The project might also signal a possible regulation regime for cryptocurrency because it is named after a landmark 1946 US Supreme Court decision that gave the Commission guidelines how to determine if particular assets are securities or not.

“We’ve recently seen fraudsters pretending to be involved in blockchain technology, initial coin offerings, and crypto-currencies – when really they are simply operating scams designed to take investors’ hard-earned money. We created the bogus site as an educational tool to alert investors to possible fraud involving digital assets like crypto-currencies and coin offerings,” the US regulator explained the purpose of its scam project.

The project

HoweyCoins has a whitepaper, celebrity endorsement and offers discounts for first users that buy tokens: key characteristics of every ICO. SEC outlines several “red flags” that signal a scam:

1. Claims of high, guaranteed returns – for example, the fake HoweyCoins offers a minimum growth rate of between 7% to 15% annualized. SEC used this as a reminder that high returns entail high risks, possibly including a total loss on the investments”;

2. Celebrity endorsements – the SEC project uses fake pictures to prove backing from influencers and celebrities, including a photo of the so-called “biggest ever” smart TV;

3. Claims of SEC license – US regulator reminds that many investment project claim to be registered and regulated while they are not. SEC maintains a web database where investors can check the information;

4. Investing with a credit card – the fake HoweyCoins claims to accept purchases with credit cards, a “red flag” because most registered investment projects do not allow these types of payments, the regulator reminds;

5.Pump and dump scams – “In a pump and dump scheme, fraudsters typically spread false or misleading information to create a buying frenzy that will “pump” up the price of a stock and then “dump” shares of the stock by selling their own shares at the inflated price,” US regulator explains in a blog post.

Why HoweyCoins?

The name of the scam project comes from a landmark US Supreme court decision: SEC vs Howey Co, which resulted in the so-called Howey test. The high court judge established a rule for checking whether one arrangement is investment contract: 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,” SEC explained the Howey test in a HoweyCoins project press-release. Under US Securities Act, all investment contracts are securities.

HoweyCoins’ red flags are very similar to the conclusions in the Texas Securities regulator report.