Perhaps in the spirit of the saying “if you can’t beat them, join them,” the Securities and Exchange Commission recently launched an initial coin offering website of its own – HoweyCoins.com. No, the SEC has not suddenly decided to join the coin offering craze. But the Office of Investor Education and Advocacy has launched this new mock site to illustrate the dangers of such offerings to retail investors. The site touts a coin investment opportunity in the travel industry and comes complete with many of the enticements common to the very offerings that the SEC is attempting to police, including a white paper with a complex but vague explanation of the opportunity, promises of guaranteed returns, and a countdown clock showing that time is running out on an opportunity for a 15% bonus. The site also claims that the coins are registered with the U.S. government and will trade on an SEC-compliant exchange. Members of the Office of Investor Education and Advocacy double as HoweyCoins promoters and the site also includes celebrity testimonials that are common in initial coin offerings. (Why “HoweyCoins”? It’s a play on the Howey Test to determine whether an investment contract is a security.)
While the site certainly looks and feels real, any opportunity to invest ends as soon as a user clicks on the “Buy Coins Now” link. At that point, the user is led to investor education tools and tips from the SEC and other financial regulators. This web site appears to be part of the SEC’s ongoing effort to combat fraudulent ICOs both through educating retail investors and targeting fraudulent schemes with enforcement actions.
On the enforcement end, the SEC is not alone. The North American Securities Administrators Association (NASAA) recently announced a coordinated series of enforcement actions by state and provincial securities regulators from more than 40 jurisdictions in North America to crack down on fraudulent ICOs and other cryptocurrency-related investment products. Coined “Operation Cryptosweep,” the investigations resulted in nearly 70 inquiries and investigations and 35 pending or completed enforcement actions from the beginning of May through May 21. A number of investigations remain ongoing and NASAA president Joseph Borg referred to the initial set of enforcement actions as “just the tip of the iceberg.” In fact, the work of the NASAA task force identified 30,000 crypto-related domain name registrations, the large majority of which appeared in 2017 or 2018. Not surprisingly, SEC Chairman Jay Clayton issued a statement in support of the NASAA sweep, calling the enforcement actions a “strong warning to would-be fraudsters in this space that many sets of eyes are watching.”
We will continue to cover ICO-related enforcement activity, which there will likely be plenty more of, on this blog.