In the last 12 months, over $8B was raised by ICOs around the world. Just like that, ICOs became the most exciting way to raise huge amounts of capital, on the scale of tens of millions of dollars per company. But ICOs also became the most dangerous way for investors to lose their money.
ICOs launched overnight, as if they just sprung from the earth, without any regard to federal securities laws. This worried the SEC and the State Administrators because one of their mandates is to protect investors from fraud. This mandate has been in place for a very long time, the current solution to which is the Securities Act of 1933.
This act requires the registration of offerings sold to main street investors, i.e. non-accredited investors cannot participate in a company’s securities sale unless that sale is registered with the SEC (or uses an exemption). As a reminder, accredited investors are those with a net worth of $1M or those who have earned at least $200k annually in the past two years.
The vast majority of ICOs sold tokens to whoever would buy them, accredited or not. The vast majority of these ICOs did not register their token sales as securities with the SEC or use an exemption, such as Regulation A+. Many, if not most, of these ICOs did not know they were breaking the law. There are a few bad actors that probably did.
In the last 6 months, the SEC issued a series of bulletins alerting investors, attorneys, promoters and CEOs of companies issuing tokens that any ICO needed to either register or seek an exemption in order issue tokens to investors.
In the now-famous words of SEC Chairman Jay Clayton, “every ICO I’ve seen is a security.”
Yesterday, in an unprecedented move, the SEC decided to launch their very own ICO with the sale of HoweyCoins. I wish I could say the tokens were named after me, but it is, in fact, a tongue-in-cheek reference to the Howey Test, a simple test to determine if an asset is a security.
HowieCoins will be the cryptocurrency standard for the travel industry — the HowieCoin white paper.
The website details how HoweyCoin, a proposed travel currency, will make money for investors with guaranteed returns. Of course, no fraudulent scheme would be complete without a series of planned pump and dumps to boost price of HoweyCoins in the short term to deliver returns for investors. The SEC staff was surely laughing when they pulled this website together.
However, they are trying to make a valid point: it is easy for anyone to launch an ICO and scam investors. Many of their satirical points may seem over-the-top in the context of the website, but they also clearly echo many ICO marketing strategies. Investors aren’t seeing the red flags.
The HoweyCoin website details the formulaic investment embellishment with an aggressive investment timeline, huge discounts for early birds, and guaranteed returns. The SEC is probably frustrated, and rightly so, with the lack of interest their bulletins have elicited from the public, so they are trying a new tactic.
The real issue is this: the SEC wants every CEO and their team of professionals to follow securities laws when selling tokens to investors. Yet the issue is not that simple because securities laws are complex and offer many options. Only experienced securities attorneys will know how to properly advise entrepreneurs.
Most of the 800+ ICOs launched in the past year did not follow any of the securities rules. This means the investors have a right to ask for their money back, and those who facilitated the sale of those “utility” tokens are potentially liable for criminal fraud and stiff penalties.
Recently, the SEC sent scores of inquiries and subpoenas to companies, promoters and attorneys. This is an unprecedented concentration of regulator fire power on a nascent marketplace and should not be taken lightly.
HoweyCoin is a great investment on paper (guaranteed profits! who can say no?). However, it is a scam, as the SEC is quick to note as soon as you try to buy coins. Surprise: there are no HoweyCoins for sale. The site is merely an educational tool.
The hope is that the HoweyCoin ICO will spread in the marketplace as an educational tool. Humor can be very powerful, and the SEC should be applauded for their creative efforts and ingenuity. Let’s hope the joke is not lost on investors.
Thanks for reading, and if you liked it, please clap 50x! If you’re interested in seeing real startups pitch their business, tune in to StartEngine’s Demo Day on May 31, where companies on our platform will be pitching to investors online.