We’ve written a lot on Initial Coin Offerings (or ICOs) recently (for example, see here for an introduction to ICOs, here for a discussion of the legality of ICOs, and here to find out about the positive aspects of ICOs) and they continue to be in the media. But, how can you differentiate between genuine ICOs and scams? Our guide below provides some principles:
ICOs play a significant role in the cryptocurrency and start-up world. With China recently banning ICOs (with one of the ostensible reasons being fear of fraud), experts and the authorities are increasingly scrutinising these crowd funding methods with interest.
One of the key features of ICOs is the complete lack of regulation. As a result, there have been more than a few scams. While this is common in new, unregulated fields it can be extremely difficult for investors to differentiate between genuine opportunities and scams.
Even scrutinising a list of recent ICOs doesn’t yield any reliable indicator of which may be scams or which may be genuine. Given that there are so many pitfalls in this space, it’s small wonder that sophisticated and experienced investors are reluctant to consider it.
Like any investment, the success or potential return on ICOs can’t be predicted with absolute certainty. What’s more, it can be difficult to conduct basic diligence on the company running the ICO: often, information about the people behind it and even simple accounting data isn’t available.
That doesn’t mean all ICOs are bad. Below are some key principles which can be applied to attempt to discern the good from the bad. With that said, we still advise caution and nothing below is intended to be a substitute for professional investment advice.
ICOs v IPOs
Many commentators liken ICOs to start-up IPOs (Initial Public Offerings). This comparison doesn’t necessarily hold true. For one, ICOs represent an abstract concept rather than a product or service. While it can be possible to make a judgement based on the individuals involved, this isn’t always applicable as cryptocurrency start-ups take place within a different legal, regulatory and management structure.
Another important consideration is that the money raised in an ICO doesn’t influence, correspond to or enhance the quality of the eventual ‘product’. An investment in a start-up is an investment in R&D, design, marketing, etc. Investment in a cryptocurrency is likely only to lead to inflated perceptions.
With this in mind, the least desirable ICOs are likely to be the ones that have no product. There will be nothing the investor can test and the company/team behind it will have only promises to go on. Slightly more appealing will be those which have a functioning product or a team with a reputation behind it. One example is Iconomi. The Iconomi ICO raised over $10m, largely thanks to the fact the team behind it were also behind Cashila, a well-regarded product. Clearly, the most appealing ICOs will be those which offer a usable version of their product.
Evaluating the team behind the ICO
Having a successful team is about half the battle. An experienced team greatly enhances the probability of success. One of the most essential elements in this is openness. Do they attach their names and faces to the project? Do they have social networks which vouch for their identities? Scammers will never unveil their true identities for fear of punishment. Videos, interviews and other media appearances are strong trust indicators.
Does the product solve a problem?
Read the whitepaper. Then read it again. Does the product offer a solution to a problem? If it doesn’t, don’t invest. Just because blockchain is being added to an existing business model doesn’t mean it will thrive. Is the idea feasible, logical and economically viable? Are there numbers in place detailing how the team plan to spend the money raised? If not, forget it. A good whitepaper will have timelines, detailed economics and market data too. The best will contain technical details.
Assess the competition
If there are competitors, then this will obviously hinder the chances of gaining a market share. That’s not to say that the product won’t, or that it won’t benefit from the competition. Ideally, the whitepaper should identify competitors who don’t use blockchain technology and identify their inefficiency. Again, the case should be clearly made about how the use of this technology adds something to the business.
Is there a working prototype?
If so, then this is a big tick in the ‘pros’ column. Ideally, this should be capable of being demoed.
Is there inflation?
Is the project going to generate new tokens? If so, this will harm your investment by reducing it. One of the reasons cryptocurrency exists is to avoid currency devaluation by central banks!
Also, check how many tokens will be distributed. A good indicator is whether the developers are going to retain any for themselves. If they do, then it provides an incentive for them to grow the business.
Spotting an ICO Fraud – Legal Advice
As we say above, this isn’t intended to provide investment advice – it’s a guide to assist in decision making in conjunction with advice and experience. We’re solicitors who specialise in assisting victims of digital fraud. If you’ve found yourself the victim of any form of digital fraud, call us today on 020 7792 5649 or email us at firstname.lastname@example.org. We can help.