Scammers continue to seek ways to mislead and defraud those unaware, making it vital to understand how to determine the authenticity of an ICO.
Initial coin offerings peaked in popularity from 2017 to 2018, with many of these ICOs turning out to be fraudulent schemes designed to snatch investors’ money before the creators vanished. The trend of using cryptocurrency offerings for crowdfunding lost favor in the U.S. when the Securities and Exchange Commission began taking legal actions against coin issuers concerned with unregistered securities.
Most ICOs are required to register with the Securities and Exchange Commission, ensuring transparency. Documents filed should be accessible through the SEC’s EDGAR system. Detailed pitchbooks explaining the utilization of received funds and whitepapers elaborating on the blockchain research are essential. Team members must exhibit experience, credibility, and connections. Authentic projects often receive backing from well-established cryptocurrency and blockchain enterprises, though this alone cannot ensure triumph or feasibility.
The SEC began evaluating ICOs against specific criteria to determine their compliance:
- Presence of an investment contract
- Participation in a common enterprise
- Expectation of profits
- Profits anticipated from a third-party’s efforts
In the U.S., the Securities and Exchange Commission oversees market activities to ensure adherence to existing regulations. Kickstarter-like ICOs initially allowed projects to sell cryptocurrencies to anyone interested, bypassing regulation and securities laws through social media and web platforms, generating hype around potential returns.
Evaluations found that ICOs and related cryptocurrencies typically met the criteria for being classified as securities. Hence, they needed to be registered with the SEC as securities or recognized as exempt offerings. Legitimacy should be verified in the SEC’s system.
Should you be unable to locate these documents on the SEC’s system, the ICO remains unregistered. Under such circumstances, waiting and observing is crucial since the issuer may not be abiding by the rules, potentially marking it as a scam. While exceptions where an ICO might not need registration do exist, they are scarce and unlikely to gain substantial traction.
Given the SEC’s position on cryptocurrencies, the foremost step in evaluating an ICO is checking its registration status. The project or company should have a Form 1-A, Offering Statement, or Form D listed and viewable.
A pitchbook, serving as a marketing blueprint, details a project’s objectives and the strategies for achieving them. It encompasses the competitive landscape, unique advantages, initial valuation, and more.
Amid the 2018 ICO craze, many initiatives published what they labeled as “whitepapers,” although these were essentially pitchbooks.
A pitchbook must specify how the venture plans to allocate the acquired funds and, if applicable, when it may start generating investor returns. These documents are instrumental in evaluating a project’s potential and instilling confidence in the team’s financial capabilities.
A thorough investigation into the individuals involved is the best defense against such fraudulent practices. If no information about a developer or founder is available on LinkedIn or other social media platforms, suspicion is warranted. Even when profiles are found, verifying activities against followers and popularity is essential. Some individuals might possess skills comparable to those of revered industry figures, but they would likely have documented research or past project involvement.
The most critical aspect of any ICO or cryptocurrency is the team driving the project. Successful cryptocurrencies often showcase renowned developers like Vitalik Buterin, Gavin Wood, Peter Wuille, Jed McCaleb, Peter Todd, and David Schwartz. To rival industry stalwarts, some ICOs fabricate fake founders and biographies.
Firms or projects lacking whitepapers may argue the necessity to safeguard intellectual property (IP) or trade secrets. Even in such instances, they should provide ample information to convince potential investors of their legitimacy as a blockchain and cryptocurrency initiative.
Whitepapers can unveil crucial insights, though you might not grasp all the terminologies due to industry-specific jargon. This isn’t detrimental. Unlike pitchbooks, whitepapers concentrate on presenting a structured research document for blockchain and cryptocurrency, highlighting:
- Problems addressed by the blockchain and cryptocurrency
- Design of the blockchain
- Network protocols
- Consensus protocols, if necessary
- Unique blockchain-related subjects
For instance, the XRP 2014 whitepaper began with an introduction before detailing components, terminologies, consensus aspirations, the project’s bespoke consensus algorithm, and supplementary information about the blockchain foundation. Financing was not discussed.
Despite appearing apparent, the ICOs most likely to succeed are those with innovative market offerings. Without distinctiveness, projects replicating existing services are less likely to succeed. Genuine differentiation is necessary to avoid the cryptocurrency graveyard alongside countless other identical ventures.
Warning
Project backing and business investments are positive indicators, yet they don’t guarantee a project’s success or profitability. Even with scrutinized vetting, scams may still infiltrate, underscoring the necessity of comprehending that verifying the authenticity of a project and cryptocurrency might be impossible. The industry currently lacks sufficient regulation for investors favoring low- to moderate-risk investments.
New and legitimate blockchain or cryptocurrency ventures are often either affiliated with, sponsored by, or supported by other reputable projects or enterprises.
Coinbase Ventures, another incubator, features 0x, Alchemy, Consensys, and OpenSea in its portfolio.
Babylon, an initiative allowing Bitcoin holders to stake dormant bitcoins for returns, receives sponsorship and investment from Binance Labs, an incubator for promising projects. Although the project’s fate remains uncertain, the incubator’s claim of having vetted and invested suggests potential amid its anticipated token launch.
Are 80% of ICOs Scams?
Historically, over 80% of ICOs were scams, a trend that continues to an extent today. Nonetheless, genuine projects still seek funding.
Can You Make Money From an ICO?
Profiting from an ICO is feasible, but the challenge lies in discerning a legitimate offering with substantial success probabilities amid a market teeming with similar projects.
What Are the Biggest Cryptocurrency Scams?
Romance and ransomware schemes rank among the leading cryptocurrency scams, followed by fake exchange scams where scammers freeze trading accounts post-funding.
Conduct thorough research, connect with like-minded investors, confirm with regulators, and ultimately remember that cryptocurrencies, like legitimate ICOs and projects with affluent sponsors, remain speculative ventures.
Early adopters fueled the most prosperous ICOs and cryptocurrencies. The allure of swift wealth predates recorded history, with similar outcomes. A select few early participants prosper while numerous others fail in their pursuit.
Authentic ICOs strive to establish their legitimacy by registering with regulatory bodies, publishing pitchbooks, and maintaining verifiable track records. Legitimate companies will neither distribute cryptocurrency directly to your wallet nor pressure swift decision-making.
The comments, opinions, and analyses shared are intended solely for informational purposes. For additional details, refer to our disclosure. As of the article’s publication date, the author owns BTC and XRP.