The Risks of Initial Coin Offerings (ICOs)
Initial coin offerings, or ICOs, are a new way to raise money for a blockchain-based business using cryptocurrencies. ICOs resemble other forms of crowdfunding because large groups of people are able to buy into the offerings.
You should understand ICOs and the risks that come with speculative investments before buying this type of crypto asset.
How an Initial Coin Offering Works
To run an ICO, a company sells its own coins or tokens to the public. Often the issuer writes a white paper or article describing its plans and uses for the ICO’s proceeds.
These documents are not prospectuses, which are disclosure documents required by securities laws. For this reason, ICO documentation may not present all of the important details about the offering you should consider before making an investment.
You generally buy into an ICO with another cryptocurrency, such as Bitcoin or Ether. Sometimes ICOs allow purchases with a government-backed currency, like Canadian dollars.
In return, ICO issuers create digital coins that can have a range of uses. Sometimes the coins can only be used to purchase the company’s products and services. In other cases, the coins exist to hold value relative to other cryptocurrencies.
The function of the coin may be a factor used to determine if the coin is a security.
The Risks of Buying or Investing in ICOs
Investors should consider the risks before deciding to participate in an ICO.
Some risks of ICOs include:
- Many ICOs are startup concepts that have no businesses or operations behind them.
- If the offering is not subject to securities regulations, there are no disclosure requirements and that can complicate your ability to evaluate the offering.
- It may be difficult or impossible to get a full picture of the purposes of the ICO before you invest.
- The value of coins and tokens in the ICO can be speculative. The value can go up and down drastically, and the purpose of the coin may never happen.
If securities laws do not apply to the ICO, the British Columbia Securities Commission (BCSC) does not regulate the offering. This means few, or no, protections are available if the ICO is based on misrepresentations or a fraudulent scheme.
You can read more about the risks of ICOs on the High-Risk Investments page on InvestRight.org.
How to Protect Yourself from ICO Scams
Before investing in an ICO, consider these questions:
- Are you influenced by hype or speculation?
- Think about why you want to invest in a digital coin or token.
- Are the issuers capable of bringing the ICO’s idea through to fruition?
- Review the business plan and stakeholders to see if they have experience working in blockchain-based businesses or related industries.
- Does the company make a good case for the money it is trying to raise?
- See if offering documents or white papers explain the purposes for the ICO’s proceeds, and if those purposes make sense.
- Where is the company located?
- Foreign locations could make it more difficult to get enough information or get help if a problem occurs.
You should also be aware of the Fraud Warning Signs when looking to purchase any investment, including ICOs.
If you think you’ve come in contact with an ICO scam, contact the BCSC. We may be able to help or refer your complaint to the appropriate agency.
More Information about ICOs
The North American Securities Administrators Association (NASAA) published two investor advisories that reference ICOs and cryptocurrencies:
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393 or through e-mail at [email protected] You can also file a complaint or submit a tip anonymously using the BCSC’s online complaint form.
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