Main page on the bogus ICO site. Photo: The United States Securities and Exchange Commission
Main page on the bogus ICO site. Photo: The United States Securities and Exchange Commission

The HoweyCoin’s website launch page is as emphatic as it is gushing.

“Don’t miss this exclusive opportunity,” says the online announcement, declaring that the pre-ICO sale of Howey Coins is “live”.

“Combining the two most growth-oriented segments of the digital economy, blockchain technology and travel, HoweyCoin is the newest and only coin offering that captures the magic of coin trading profits AND the excitement and guaranteed returns of the travel industry.”

The “massive potential upside benefits” included official registration of the HoweyCoin with the US government and a trading exchange environment that is SEC-compliant, “where you can buy and sell them for profit” or exchange them “for crypto-currencies and cash.” The HoweyCoin can even be “spent at any participating airline or hotel”.

What’s not to like? Well, only the fact that none of it is true. The so-called HoweyCoin is the clever brainchild of the US Securities and Exchange Commission (SEC), the Washington agency responsible for enforcing federal securities laws and not exactly known for its public displays of humor.

The SEC says it set up the website to mimic “a bogus coin offering to educate investors about what to look for before they invest in a scam. Anyone who clicks on ‘Buy Coins Now’ will be led instead to investor education tools and tips from the SEC and other financial regulators.”

“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,” said SEC chairman Jay Clayton. “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. Distributed ledger technology can add efficiency to the capital raising process, but promoters and issuers need to make sure they follow the securities laws. I encourage investors to do their diligence and ask questions.”

The SEC explains that the website features several of the enticements that are common to fraudulent offerings, including a white paper 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”.

The name, HoweyCoin, is a nod to the landmark 1946 US Supreme Court decision, SEC vs WJ Howey Co, that held that a transaction is an investment contract, or 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.”

The precedent has become popularly known as the Howey Test and has become central to the debate, in the US and beyond, on why and how digital currencies should be regulated. Bitcoin is currently treated as an asset by Washington, and as such remains largely unregulated. ICOs, however, are considered securities, because they pass the Howey Test, which means they must be registered to comply with federal law.

The HoweyCoin website is the latest and certainly the smartest attempt by the SEC to warn investors about the investment and fraud risks associated with ICOs.

“Fraudsters can quickly build an attractive website and load it up with convoluted jargon to lure investors into phony deals,” said Owen Donley, chief counsel of the SEC’s Office of Investor Education and Advocacy, who doubles as “Josh Hinze” on the HoweyCoins website. “But fraudulent sites also often have red flags that can be dead giveaways if you know what to look for.”

The Howey Coin website was built in-house and in very little time, warned the SEC, which demonstrates just how easy it is for someone to create a scam opportunity.

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