Fraud in the cryptocurrency market is an increasing concern of the US Securities and Exchange Commission, and the SEC is taking steps to both educate investors and go after those committing the fraud.
To help potential investors spot fraudulent Initial Coin Offerings (ICOs), the SEC has deployed a new tactic—a mock ICO website.
ICOs are similar to IPOs. Companies or projects offer cryptographic blockchain-based coins or tokens to investors through ICOs as a way to raise funds. The tokens offer investors some benefits such as merchandise, discounts, memberships, or other offers, in addition to serving as an investment. Investors hope the value of the tokens will rise, allowing them to sell the tokens later for a return on their investment.
Screenshot of the SEC’s HoweyCoin website’s home page.
The SEC’s website, Howeycoins.com, appears to offer investors an “exclusive opportunity” to invest in the “HoweyCoins Travel Network.” The mock ICO site includes many red flags that the SEC hopes investors will learn are signs of a suspect ICO.
SEC Chairman Jay Clayton said in a press release that he hoped the website will “encourage investors to do their diligence and ask questions” before investing in ICOs.
The name for the SEC’s Howeycoins website is derived from the Howey Test, a standard courts use to determine if a transaction constitutes a security. The many red flags on the site include:
- Claims of high or guaranteed returns.
- Celebrity endorsements.
- Claims that the tokens are “SEC compliant.”
- The option to purchase tokens with a credit card.
- Offers to “pump” the value of the tokens shortly after the pre-ICO sale phase, also known as a “pump and dump” scheme.
If one clicks on the link to purchase HoweyCoins, the website redirects to a page on Investor.gov, the SEC’s site for investors, which teaches the viewer to analyze the red flags on the HoweyCoins site. The page also provides links to relevant investor alerts, including those on Bitcoin and other virtual currencies, public companies making ICO-related claims, Ponzi schemes that use virtual currencies and celebrity endorsements.
The SEC considers cryptographic blockchain-based coins or tokens to be a type of security, although that position is being contested in court. Nevertheless, the SEC continues to enforce securities laws and regulations in the cryptocurrency market and has brought enforcement actions against a number of fraudulent ICOs.
There have been many cases of the SEC pursuing enforcement actions against fraudulent ICOs in recent years. For example, in 2017, the SEC froze $15 million in assets generated by the PlexCoin ICO after receiving a complaint about it. PlexCoin allegedly advertised returns of 1,354% in less than 29 days; claimed it had a team of international experts behind the project when in truth no such team existed; and hid the identity of its founder, Dominic Lacroix, who had previously violated Canadian securities laws.
In a separate enforcement action, the SEC filed fraud charges in 2017 against the Diamond Reserve Club World, REcoin Group Foundation and their founder, Maksim Zaslavskiy. The companies’ founder advertised that the cryptocurrencies were backed by actual assets — diamonds and real estate — but the SEC alleged that no such assets existed. The SEC continues to pursue both the PlexCoin and the REcoin enforcement actions.
Under the SEC whistleblower program, those who provide information to the SEC about a fraudulent ICO may do so confidentially. If the SEC takes enforcement action and sanctions are ordered as a result of the whistleblower’s information, then the whistleblower will receive a reward. For a free, confidential review of your whistleblower claim, contact us.
About Phillips & Cohen LLP
Phillips & Cohen is the most successful law firm representing whistleblowers, with recoveries from our cases totaling over $12.3 billion. We have been recognized on such lists as the “Hot List of Plaintiffs’ Attorneys” (National Law Journal), “500 Leading Lawyers in America” (Lawdragon) and “Best Lawyers” (US News and World Report). Our attorneys and cases have often been in The New York Times, The Wall Street Journal, the Financial Times and other news publications, and three of our cases have been featured in the CBS series, “Whistleblower.” The firm’s roster includes former federal prosecutors, the first head of the SEC Office of the Whistleblower, a former deputy administrator of the Centers for Medicare and Medicaid Services, the author of a leading treatise on the False Claims Act and attorneys with decades of experience representing whistleblowers.