Category: ICO

Selecting good ICOs

Fortune

ICOs are awesome in their potential for profit and loss, but their main product is FOMO.  It’s easy to get carried away and invest in a little bit of everything when you’re afraid of missing out on a great deal.  Unfortunately without research it’s almost impossible to expect a return on a random ICO out of the thousands available.  We could really use a sieve to filter out the ones not worth spending any time on.

First the obligatory warnings; I don’t know anything about finances or investments. But one thing should be obvious from the start; no ICO is safe.  By definition this is an unregulated market that offers no guarantees, so you are implicitly accepting all the risks and have no clear recourse in case of problems.  Even if there were government regulations controlling ICO issuance, you should still take on all the risks, because why should others have to pay for your stupidity?

That’s why the first step is to figure out what legal framework the ICO will be operating under.

  1. The legal status of the enterprise you invest in can protect you against lawsuits (Limited Liability Companies, etc.).   Not so with ICOs, their legal status is so vague, until there is an actual lawsuit against an ICO the only thing protecting you is anonymity.  But then if you invest in something anonymously, how can you claim your shares?
  2. One exception is “Legal ICOs” in Québec, where they are experimenting with letting people invest in an “ICO”, as long as all the local rules for angel investing are applied; they seem to assume that if one is savvy enough to use cryptos, that person is qualified to invest in ICOs. Unfortunately so far none of the “legal ICOs” are actual ICOs at all because to respect the rules, they have to retain total centralized control of the blockchain.  No decentralized blockchain, no crypto-coin, so no ICO.  Just put your money somewhere else with better marketing bullshit.
  3. Where is the ICO team based; is it somewhere where you could have legal recourse if people simply vanish with your money?  Do you even understand the language they would use in their local court of law?

If it seems like you’re throwing your money into a legal black hole, then you probably are. Most scammers hope it’s not worth the terrible hassle of you trying to get your money back.  So it is worth taking the risk?

  1. Unless an ICO or ITO has a unique value or property – something that can’t be done without a blockchain or that no one else has done before – then you’re giving your money to a latecomer who doesn’t understand the competition and will give up as soon as the ICO is over.
  2. There have been several generations of “ICOs” or investments in blockchain startups now; with different names and attributes. The first was share purchases starting around 21012 on centralized exchanges like Crypto-stocks, Havelock, BTCTC, LTCstocks, etc.  Of the several hundreds of those, I personally only know of only three of them still running and trying to pay dividends on those original shares, which is quite a let-down. There are still people using that model today but because the size of investments doesn’t even compare (severeal tens of thousands of dollars back then compared to tens of millions in ICOs), it’s not very popular anymore.  Then came “colored coins” ICOs like BitShares offering.  I haven’t heard of anyone still getting dividends on any of those; they might exist but they don’t make the news anymore.  Then finally came Ethereum ICOs with their gigantic amounts of money but the only profit so far in any of them has been with quick pumps and dumps. The biggest difference with Eth ICOs is how easy it is to automate the scam; install the WordPress ICO theme, the Solidity ICO scripts, buy a white paper and you’re in business.  How many will sitll be around in a year; 1/100?  1/1000?  One? The upside is huge, and the odds seem better than playing the lottery, but just like gambling the only way to make sure you have money in the end is to avoid playing.
  3. Who wrote the white paper?  A member of an actual organization with provable credentials, or a professional white paper writer who came up with some superficial but very marketable technical plan in exchange for bitcoins?  Have you read it and understood it?  Reading, understanding and laughing out loud at white papers is a time-consuming business so I always keep this step for last.  Usually I find something so ridiculous in there that I waste a lot of time commenting and joking about it on troll boxes, so even if I don’t invest in a scam ICO it still ends up being a terrible waste of money and time.
  4. Run the numbers on the funding versus the plan and the deadlines.  I don’t know any software dev who can really deliver good code when he’s busy picking the leather design in his 2nd private jet.

So a quick checklist to decide to go skip or study an ICO:

  1. Where is the team?  Other side of the world? Skip it.
  2. Who are they, are they incorporated, do they seem to know anything about running a company?  No lawyer, no power. Skip it. (Note that so many crypto scams have been run by lawyers that they’re almost a guarantee of loss.  But totally ignoring legal responsibility is just as bad.)
  3. Is an ICO necessary for this business or is it just a marketing buzzword?  Cash grab, skip it.
  4. Is the technology or business model unique at first glance?  If not, skip it.
  5. Is the white paper legible?  Does the business model really make sense?  Does the technology really make sense, how far along is it?
  6. Is the money raised proportional to the business requirements?  Ridiculous numbers? Skip it.

That’s just a few of the reasons to reject an ICO; if you think that means rejecting 99% offhand, you’re right. Real investment funds spend most of their time analyzing investment opportunities and rejecting most of them; ICOs don’t make this process easier, they make it riskier; the average shmuck isn’t going to win at this any more than professionals just because they think they’re brilliant early investors!

In the end, holding the “mother” token on which the ITO is run is a lot like being at the top of a pyramid scheme.  If you own Bitcoins or Ethereum then you can profit from the demand for these coins from ICOs while taking on almost none of the risks; at least you shouldn’t lose your coins from a bug even if a smart contract scheme goes awry.  Want to invest in all ICOs?  Buy and hold real cryptocoins.  That’s how I know I haven’t lost any money to ICOs since The Dao!

 

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

Fortune

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.