When is “OUR ICO is LEGAL!” a scam? When it’s not REALLY an ICO!

China might be “banning” Initial Coin Offerings (ICOs) but what they’re really doing is reminding people that there are rules to issuing securities.  Things are no different in North America; as long as you respect the rules, you can sell shares are get investments in your company and call it anything you like. For example in Québec the “Authorité des Marchés Financiers” (AMF) lets you create and sell shares of your company to anyone that understands what it is they’re buying and investing in.  These people are known as “qualified investors”; people who have proven that they have the experience and financial knowledge to understand the risks of investing in a startup.  One of the ways people usually demonstrate that they are qualified is, for example, by having a  personal fortune of a million dollars or more. You can have reasonable expectations that someone who built a fortune has the know-how to protect it.

That’s one of the main issues governments have with ICOs as they stand right now: anyone can invest without any real idea of the risks involved. There is no check on the competence of the investors AND those investors have no idea what responsibilities they are taking on.  Did you know that if you invest in something that isn’t a “limited liability company” (LLC) that does say, wearable computing and the products end up burning people alive, as a shareholder YOU could be sued for the damages?  But through an ICO how are you going to find the people responsible? There are far more risks involved in ICOs than just seeing the guy who stole all your Bitcoins or Ethereums run away and die in a hurricane sipping on Mai Tais on a tropical island.  It’s not hard to understand that the SEC or AMF are not fans of ICOs, but they don’t necessarily want to prevent legit jobs from being created.

Is there a compromise that would satisfy both the desire of the startup to issue shares through an ICO and the AMF’s requirement to have qualified investors?  Not really – not yet!  The AMF is currently running an experiment (a bad one, imho) where they are relaxing what it means to be a “qualified investors”.  Basically what they are letting the startup do is sell shares through an pseudo “ICO” AS LONG AS the company KEEPS CONTROL of the secondary market (as they must).  You won’t be able to trade your shares without going through them; without an IPO this is a legal requirement, there is no change here. This means ALL of the ICO token’s trading will be centralized.  And they control the market price/token issuance.

The end result?  This ICO is NOT AN ICO; there is NO NEED for a blockchain or token, they are basically replacing their shareholders database for a database stored on someone else’s blockchain.  THERE IS NO POINT OR VALUE to this.  And unfortunately, when that company starts going down, you won’t be able to sell your shares and save one bit of your money. AND ALL FUTURE local ICOs/Cryptocoins will SUFFER from this failure.  I appreciate that the government is trying to keep an open mind about new Fintech, but I believe this is the wrong approach; they shouldn’t relax the conditions for creating ICOs, they should enable and facilitate more “qualified trading” through Blockchain technology!

I would tell you “Caveat Emptor” – Buyer beware – but if you’re a “qualified investor” you already know this.  And if you invested in things like the “First legal ICO in country X” without understanding the white paper, qualified, you are not. It’s not, in itself, a scam – the approach IS legal apparently – but it is a MARKETING scam.  This is not an ICO. You should buy and hodl Bitcoin and encourage others to do the same and you would profit more than investing in this. The saying “A rising tide raises all boats” describes real Cryptocurrencies like Bitcoin perfectly.

As always, I’m not qualified in any of this, not a lawyer, not a financial adviser, so don’t take this as legal or investment advice.  All I did was read the white paper. It made my soul bleed a little.

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