ICOS: Identify Cons Or Scams - How To Spot a Good ICO

June 2018
Over the past couple of years or so there has been a plethora of ICOs. Whilst the fundraising method has enabled a host of excellent start-ups to thrive, the method has also garnered a rather bad press thanks to a general lack of regulation, leading to a number of bad actors taking advantage of the system, and many investors being caught out by scams on a huge scale. Pitfalls can vary but include phishing scams, Ponzi schemes, pump-and-dumps and cash grabs with no real product behind them. Despite these dangers, ICOs have been so popular that they are now raising more money for the blockchain space than traditional VCs and Angel Investors, and have been for some time.

It is vital that potential investors do thorough research into start-ups and companies that they plan to fund and not solely read the news about them, watch coin prices or listen to people promoting them through social media. There are a number of areas to investigate and consider when deciding how much potential a project has. A number of these will be discussed below.

A Viable Solution?

One of the most important things to consider when looking to invest in project is whether or not it solves a real issue. It is often stated and is fairly obvious but, to have any long term viability, there needs to be an actual reason for the solution to exist. This also means that any existing competition should be compared with the project behind the ICO to see if the company’s solution adds anything to what already exists. This could be that the company does something more effectively, is scalable, targets a different market, is compliant with regulation or realises some other aspects. E.g. If a number of knock-off bitcoin start-ups suddenly launched an ICO there would be no reason to invest. Often, the best and most successful start-ups identify a key problem or market gap and solve it.

Linked to this is the general choice of blockchain and ICO format. Does the project need a blockchain to function as intended or is it simply jumping on the hype? Is it necessary for the company to have its own token - does it have any added utility over ether or bitcoin? When conducting the ICO, a KYC process should be expected and the lack of one indicates that the company does not care where its funding comes from and might be a worrying sign to investors.


The Right Whitepaper

The viability of the solution can’t truly be assessed without a strong whitepaper to back it up. This is where a lot of the validity of the company can be determined. It’s all well and good to state that a company is coming up with a solution to a key problem, but unless some concrete information as to how the product will work is provided, it’s simply a statement and shouldn’t be trusted. Some general things to look for in a whitepaper include the amount of detail it goes into: a few pages is a warning to look no further but a few dozen is a good sign. Alongside this, the whitepaper might be expected to have a professional tone but would definitely be expected to have correct grammar and punctuation. When e-mail scams are sent out they often have poor punctuation and grammar so that only their intended targets for the scams fall for it and reply - the same may be applied to ICOs. However, it is important to bear in mind that the whitepaper may have simply been translated from its original language with some errors - it is up to the investor to determine if this is the case.

It is also important to note that there have been cases where a company puts out a whitepaper which has been plagiarised from another existing whitepaper - this is one of the other reasons that looking at competitors whitepapers and solutions is vital. A company that has taken sections of others work is not likely to be legitimate or trustworthy.


Identify the Team

Also vital to evaluate is the team behind the product. A brief bio of the team is expected in the whitepaper but this needs to be checked by visiting multiple forms of social media to establish whether or not the team members are actually real. There have been instances where fraudulent ICOs have used fake profiles with random or photoshopped pictures to fool investors. Another good sign is if the team attends relevant events as exhibitors and especially as speakers. Besides checking the legitimacy of the people, their expertise and background need to be assessed in connection with the project; a gardener is unlikely to have developed a blockchain solution for financial services for example. Also worth checking is the website and social media presence of the company. Platforms such as facebook, twitter, reddit, slack, medium, telegram, github etc. are all good places to look to see if company appears to be genuine or just a shell.

If in doubt, find some of the social media channels that the company is active in and engage in conversation. This can be a good way to find out if they are real people, have the knowledge they need to succeed, and are serious about their project.

Future Plans

Another area to consider is the future plans of the company, both in terms of its future roadmap and the use of its ICO. Does the roadmap have a logical and realistic path, with clear goals set out? Does it even exist? A lack of a roadmap could indicate that the company is only interested in raising money and doesn’t have any plans to develop further. On the ICO front, one danger sign can be an unlimited hard cap. Another can be the sale of only a small proportion of the tokens with a high hard cap. Last year, Gnosis was thought by many to be a scam (it wasn’t) when it tried a new method of ICO which resulted in around $13 million being raised for approximately 5% of the total number of tokens. Whilst Gnosis was not trying to scam investors, other ICOs with similar approaches are not so likely to be legitimate. In addition, the proposed use of the funds raised during the ICO may give an idea as to the true goals of the company.


Past Performance

Besides these aspects, a good indicator of a strong project lies in its development to date. Is the ICO being launched with a working product? If so it is a good sign that it is a legitimate project as scams are not likely generate actual solutions. If a company already has a minimum viable product then they are serious about their work. It is also looking at where the funding of the project (if any) has come from previously. If the team has put in their own money or it has received funding from traditional avenues such as venture capitalists, it is more likely that the project has potential.

Regardless of the outcome of the analysis into an ICO, an investor who chooses to fund a project needs to ensure that their funding goes through a legitimate channel as there have been many examples of scammers opening up fake website and social media accounts and tricking investors into sending funds to the wrong wallets. To avoid this, investors should only go through the company’s official channels - preferably found via its website - when paying into an ICO.

Regulators, notably those in Gibraltar and Switzerland recently, are implementing standards and guidelines for ICOs and investors are armed with better knowledge. New legal requirements will see ICOs directed to carry out KYC and AML checks. Hopefully, the worst of the wild west days of ICO are over, but even when global standards come in, investors should ensure they take precautions and analyse options to the best of their ability.

And remember the standard investment advice, only invest what you can afford to lose!