Washington wants you to know what a cryptocurrency scam looks like—so regulators made one up.

The Securities and Exchange Commission—an 84-year-old agency not known for its digital communications savvy—on Wednesday launched a website that touts a fake initial coin offering, an unregulated way of raising funds that has raised over $12 billion. The SEC says many ICOs are probably fraudulent, with bad guys evading investor protections and selling digital tokens that turn out to be worthless for the buyers.

The SEC’s fake token, “HoweyCoin,” plays up many of the features of ICOs that regulators say are red flags, including celebrity endorsements and guaranteed returns on investment. The mock token sale includes a “white paper” to explain the fake project, which is styled as a partnership with the travel industry. HoweyCoin will be the “coin of the realm” for travel, the paper says.

Regulators say investors should be suspicious of token sales that offer discounts to early buyers. The HoweyCoin site advertises tiers of discounts, including a “double 25% discount” for buyers who invest by June 1.

People who click on the “Buy Coins Now!” link are taken to an SEC webpage that says: “If you responded to an investment offer like this, you could have been scammed—HoweyCoins are completely fake!”

Speaking Wednesday at a venture-capital conference, SEC Chairman

Jay Clayton

said the discounts should be a too-good-to-be-true warning for investors.

“Buy at a 25% discount today because tomorrow it’s going to be full value? Are you kidding me?” he said.

The token’s name is a reference to the Howey test, the Supreme Court’s formula for determining whether certain transactions qualify as investment contracts.

The SEC hasn’t approved any public token sales, which it says should comply with rules such as giving investors audited financial statements and descriptions of the business and its risks.

Some cryptocurrency backers say rigid rules for public stock sales don’t fit the business models of some firms selling tokens, because the coins are ultimately intended to be exchanged for access to a technology application or platform. Even so, many tokens have been actively offered for sale on trading platforms, which the SEC says are operating as illegal exchanges.

“The fact that our staff could put together something that looks just like an ICO in very little time and with very little resources shows how little you have to put into this to market a token,” Mr. Clayton said.

The website is a rare instance of the SEC, an agency whose communication is often steeped in legalese, using the web—and a sense of humor—to warn about risks in a way that could go viral. The SEC put HoweyCoins online on the last day of Consensus, one of the biggest conferences for cryptocurrency investors and developers.

“It’s great that they’re educating investors and not just being paternalistic,” said Trevor Koverko, chief executive of Polymath, a Toronto-based blockchain company that raised $58 million through a private token sale. “And it’s creative too, which I wouldn’t have expected.”

Judging by the response on Twitter, other crypto advocates agreed. “I am not a fan of overt regulation—but damn SEC, this is clever and beneficial to the #crypto market. Point Feds,” wrote a user called Dank Coins. “P.S. don’t invest in Howeycoin lol.”

“All in on #Howeycoin, this will be clearly a market winner in 2018,” wrote another user, known as HitechTrader, in a tongue-in-cheek post.

The SEC has sued several promoters of token sales that it says are illegal and halted others by calling the firms and questioning whether they had a valid exemption from regulation. Steven Peikin, the agency’s co-director of enforcement, told a congressional hearing Wednesday that the SEC has dozens of enforcement investigations looking into token offerings.

“We have resources; we’re going to bring cases when people violate the law,” Mr. Clayton told the venture-capital conference.

Write to Dave Michaels at dave.michaels@wsj.com

Appeared in the May 17, 2018, print edition as ‘SEC Launches Site To Combat Scams.’



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