U.S. watch­dog’s fake ICO ven­ture tries to teach am­a­teur in­vestors a les­son

Edmonton Journal - - FINANCIAL POST - MATT ROBIN­SON

A hot new ini­tial coin of­fer­ing gives in­vestors the chance of a life­time to make money from sun-soaked beaches and crys­tal­clear 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-tobe-true ven­tures. The bogus dig­i­tal cur­rency, called HoweyCoins, has a sleek web­site, com­plete with a white pa­per, and pic­tures of madeup celebrity pro­mot­ers and lux­u­ri­ous des­ti­na­tions. The to­ken’s back­ers an­tic­i­pate at least one per cent 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’ll find a stark warn­ing: “If you re­sponded to an in­vest­ment of­fer like this you could have been scammed — HoweyCoins are com­pletely fake!”

The phoney 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.

Ear­lier Wed­nes­day, one of the lead en­forcers at the SEC told mem­bers of Congress that ICOs are now 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.

ERIC BARADAT/AFP/GETTY IM­AGES

The SEC used a phoney web­page to show mom-and-pop in­vestors the high risk of fraud in ICO in­vest­ments.

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