A hot new initial coin offering gives investors the chance of a lifetime to make money from sun-soaked beaches and crystal-clear waters. It also provides something even more valuable: advice on how to avoid getting ripped off by fraudulent ICOs.
The Securities and Exchange Commission is pitching a fake initial coin offering to educate investors on the pitfalls of too-good-to-be-true ventures. The bogus digital currency, called HoweyCoins, has a sleek website, complete with a white paper, and pictures of made-up celebrity promoters and luxurious destinations. The token’s backers anticipate at least 1% daily returns and a hedge against inflation by combining “the magic of coin trading profits and the excitement and guaranteed returns of the travel industry.”
Clicking on "Buy Coins Now!" redirects potential investors to the SEC’s website where they will find a stark warning: “If you responded to an investment offer like this you could have been scammed — HoweyCoins are completely fake!”
The phony webpage is the SEC’s latest gambit to try to convince the investing public that ICOs — in which companies sell digital tokens that can eventually be redeemed for goods or services — are highly susceptible to fraud. Despite the warnings, the token sales continue to raise billions of dollars.
On Wednesday, one of the lead enforcers at the SEC told members of Congress that ICOs are now among among the “greatest threats” to mom-and-pop investors. The agency has “dozens of investigations that are ongoing” with a particular focus on determining whether specific tokens are securities, Steve Peikin, co-head of the SEC’s enforcement division, said before a House panel.
The agency has said it considers the vast majority to be securities, which require SEC registration under federal law. Peikin said there is a good chance that many of the regulator’s probes will lead to enforcement actions.
The fake ICO is a bit of an inside joke from the regulator. “Howey” comes from a Supreme Court decision in the 1940s that defined what a security is. Generally, a security is created when investors provide money that funds a company with the intention of profiting from the actions of that company’s management.
The SEC has previously used gimmicks to warn unsophisticated investors about the dangers of fraud. In 2003, the agency created a fake hedge fund offering, called GRDI Select LP, with the name being a reference to greedy.