This short article is a warning to investors to employ extra due diligence prior to making any investment in initial coin offerings or token offerings as they are sometimes called. If there was ever a case for caveat emptor it is in the investment of Crypto coins or tokens.
Initial coin offerings are a relatively new development designed to raise funds for blockchain start-ups. Like anything new to do with finance they also present an opportunity for innovative fraudsters to exploit innocent would be investors.
The point must be made not all ICO’s are frauds, there have been numerous very successful ICO’s indeed Investopedia https://tinyurl.com/y6p9a4o7 reports the most successful ICO sold tokens for 3 cents and saw their price rise to roughly £180.
Statistics around ICO’s vary and a google of the subject gives you some idea of the sort of investments being made. https://www.icodata.io states $7,812,150,041 dollars have been raised by 1,253 ICO’s in 2018 https://www.icodata.io/stats/2018.
Whatever the real figure is, it is apparent that numerous ICO’s are offering investment opportunities. So why the need for extra due diligence? The first and most powerful reason is because in the main you are investing in a concept that might not ever happen.
With an initial public offering (IPO) you are buying into something and these are strictly regulated. ICO’s (perhaps so named as to mimic the IPO) circumnavigate the strict regulations regarding investments. All ICO’s comprise the same basic elements, a website offering the coin or token with the basics of the idea being invested in. This is always blockchain related and there are some wacky ideas out there about how blockchains are essential for this particular token to work. We are all familiar with fraudsters trying to pressurise and rush investors into making quick decisions to part with their funds and this is a trait carried on by these websites which will inevitably have a clock showing time running out and a number of terrific discounts for early investments. And each will have a “white paper” a document explaining in detail the principles of the concept, how it will work and, in some cases, showing projected return on investment. The white paper may show projected stepping stones and time lines for development but importantly it will relate to activity that may take place in the future.
Many market their product using the success of previous cryptocurrencies. For example, stating “ you missed the boat, were to late for the party to invest in Bitcoin or Ethereum but if you invest in XXXX now your returns will be phenomenal.”
For an excellent example of an ICO visit the Howey coins website at https://www.howeycoins.com/index.html this has all the characteristics of an ICO website. However when you hit the button to buy Howey coins you get redirected directly to the SEC website because the whole Howey coins website is fake! Deliberately created by the SEC to warn potential investors about the dangers of not carrying out due diligence.
I would urge any investor to use this link to the securities and Exchange Commission website: https://www.sec.gov/ICO and also see what the Financial Conduct Authority say about ICO’s here https://tinyurl.com/y7laxke7
As New York Times put it, “If you’re having trouble picturing it: Imagine that a friend is building a casino and asks you to invest. In exchange, you get chips that can be used at the casino’s tables once it’s finished. Now imagine that the value of the chips isn’t fixed, and will instead fluctuate depending on the popularity of the casino, the number of other gamblers and the regulatory environment for casinos. Oh, and instead of a friend, imagine it’s a stranger on the internet who might be using a fake name, who might not actually know how to build a casino, and whom you probably can’t sue for fraud if he steals your money and uses it to buy a Porsche instead. That’s an I.C.O.” See this link for the full article https://tinyurl.com/yc68uxda