Many companies looking to invest in new technologies are raising funds through the ICO mechanism (Initial Coin Offering). It is a simple and effective way for them to raise funds to finance their projects in virtual currencies such as BitCoin, while avoiding a number of regulatory constraints found in traditional mechanisms such as IPOs or others.
As a result, a reasonable investor must ask himself a number of questions before investing in these products with high potential, certainly but whose risks are also very high.
This is six questions to ask before investing in a ICO.
Do we receive securities in exchange for participating in fundraising?
This is a very important point. Indeed, just as the SEC stated in its Investor Newsletter, if the offer is a sale of tokens or virtual currency in an ICO constitutes an offer of securities, then federal securities laws apply. This means that the ICO (the offer and sale of tokens) must be registered with the SEC. Offers made under an exemption from registration generally require investors to meet certain income or net worth thresholds in order to invest. For example, offers exempt from SEC registration are often limited to accredited investors who maintain certain income levels. Here are some tips:
- Check if a company that launched the ICO has registered with the SEC by searching the SEC’s Edgar system.
- If the ICO is described as a crowdfunding opportunity, it could operate outside the requirements of participatory investment regulations or federal securities laws in general.
Are the people who organize the fundraising event certified financial professionals?
You can also check if the members of the developer team are active on GIThub or not, you can also go snooping on the forums to get feedback from the market on the company in question, often this can be a good indicator of confidence.
What are the rights and benefits associated with owning the tokens in question?
These rights vary according to the offer. Some behave like shares and may therefore be entitled to dividends, in this case they are digital shares (as in the case of DICE/ETHEROL tokens which behave like shares associated with a virtual casino). Others are only the fuel needed to use the product (once it has expired). It is therefore important to read and understand the terms and conditions of an ICO that are specified in the white paper that contains detailed technical information on the product. The tokens do not offer any voting rights or influence on a company. Governance and the way funds are used are managed internally and investors, regardless of their weight in the company, only receive notifications of the latest events concerning the project. In addition, ICO purchases may be subject to liquidity problems as there may not be a market to sell or exchange your ICO tokens.
How can you get your money back?
Information provided to investors about ICOs should clearly indicate how you can get your money back. Ask the company if you can redeem tokens for a refund or if you are allowed to resell your tokens in a secondary market and if there are restrictions on any resale. Secondary markets, where tokens acting as securities are exchanged, must generally be listed as a national securities exchange or operate under an exemption from such listing. In addition, be aware that a secondary market may not list the tokens purchased in an ICO.
What does the company do and what does it offer?
ICOs involve an investment in highly technical and complex concepts. You should read and understand any information provided to you by the ICO issuer or offer promoters, including how the company plans to use the funds collected, an explanation in English of the technical details of the proposal and a development roadmap with specific objectives and timelines must be available and accessible to all investors. To date, most ICOs are organized by start-up companies that have not developed a final product or platform that exists on the market. This means that the information made available to you at the time of an ICO may be incomplete, subject to change and, in any case, difficult to verify. The limited information that is shared can make it difficult to achieve the due diligence necessary to make an informed investment decision before investing.
Are there protections in place to protect against hacking and other cyber security threats?
As the SEC states in its Bulletin, virtual currency exchanges, virtual currency portfolios and platforms used by companies issuing new tokens may be exposed to potential protocol failures, hacking, malware and fraud. Find out what these companies have done to protect their platform and products from these threats.
Investing in an ICO may seem like a cost-effective way to take advantage of technological developments around chained blocks, but you have to be very careful to investigate it well before investing. New technologies and topics that are the subject of media buzz are often used by fraudsters. Look for early warning signs of fraud. For example, you must be suspicious of anyone who makes guarantees that an investment will work in a certain way or makes insistent sales arguments that encourage you to “act now” before letting the opportunity go.