The SEC has consistently demonstrated concern over the marketing of cryptocurrency trading and investments in initial coin offerings (“ICOs”), which SEC Chairman Jay Clayton has called “fertile ground for bad actors to take advantage of our Main Street investors.”[i]
To illustrate the ways in which “bad actors” operate, the SEC’s Office of Investor Education and Advocacy recently created a website promoting fictional Howey Coins.[ii] The website includes red flags commonly seen in ICO promotions: guaranteed returns, special entry rates, claims of special (albeit secret) partnerships, and celebrity endorsements.[iii] Many of the approximately 1,600 cryptocurrencies now in existence have been marketed in a similar manner.[iv]
The Howey Coins website is an amusing initiative by the SEC that we hope goes viral. More importantly for investment advisers, however, is that it is further evidence the SEC is dedicated to protecting retail investors from cryptocurrency-related frauds. Investment advisers considering advising clients with regard to these offerings should also consider the light in which the SEC will view those actions, especially in hindsight if such investments prove to be fraudulent or are otherwise unsuccessful.