What are Initial Coin Offerings or ICOs?
Initial coin offerings, also known as ICOs, are a way for companies to raise money using cryptocurrencies. Lately, ICOs and cryptocurrencies have received a lot of attention from the media, investment industry, and investors.
What are Cryptocurrencies and Digital Currencies?
Cryptocurrency, or digital currency, refers to digital assets whose properties vary depending on the cryptocurrency’s terms and features. Our use of the word cryptocurrency here also includes digital assets that are structured as tokens.
Many cryptocurrencies have one or more of the following properties:
- a medium of exchange, similar to a fiat currency such as the Canadian or American dollar. Common digital currencies of this nature include Bitcoin and Ethereum.
- a specific function with the business that issued the cryptocurrency. An example is the units of the cryptocurrency functioning in a similar manner to tokens used for a laundromat or video game arcade.
- an ownership or profit interest in a business.
An ICO is just one type of cryptocurrency. The “C” in ICO stands for coin. People can purchase coins or units of a cryptocurrency to own or trade with others.
In BC, the British Columbia Securities Commission (BCSC) determines if a cryptocurrency or specific coin is a security. BC securities laws apply if a cryptocurrency is a security.
What is an Initial Coin Offering (ICO)?
An initial coin offering happens when a company issues its own cryptocurrency to purchasers. Buyers may also see the term initial token offering (ITO) instead of ICO.
Participating in an ICO may not come with equity or ownership in the issuing company. Holders of the coins may redeem their purchases for products or services at a later date or trade the coins with others. In some cases, coins are sold at a discount and provide a return on a specified date.
Buyers should take care to read the documentation about the offering to understand how the coins will be valued and used.
ICOs and Investment Scams
There are risks when buying into ICOs and cryptocurrencies. These also occur with many forms of investments.
The risks of investing in ICOs and cryptocurrencies include:
- Unclear terms – Do you understand what you are buying? Do you know about the purpose of the ICO?
- International scope – Companies offering cryptocurrencies or ICOs can be located anywhere in the world. If the company is outside BC or Canada, it may be impossible to recover your funds if there is a problem.
- Price volatility – The value of a cryptocurrency can swing up or down significantly. Does this kind of volatility fit your personal risk tolerance and the rest of your portfolio?
- Lack of liquidity – It may be hard to find a buyer at a fair price for a cryptocurrency if you choose to sell.
- May not be a security – If a cryptocurrency or coin is not a security, investor protections under BC securities laws do not apply.
The Warning Signs of Investment Fraud
In some cases, ICOs are outright scams. Investors should know the fraud warning signs to help prevent falling victim to a fraudulent scheme.
The fraud warning signs related to ICOs include:
- Guaranteed returns – There is no such thing as a guaranteed investment. Returns are possible because of the inherent risk of investing.
- Promise of high returns – If the investment sounds too good to be true, it probably is too good to be true. The investment could also be more risky than an investor thinks it is.
- Get in now – Be wary of pressure to make a quick decision. Take your time researching the ICO before investing any money.
- Unsolicited offers – A sales pitch you didn’t ask for from a company you don’t know of can be a red flag for fraud. Think twice about investment pitches you receive via email, social media, or phone call.
These warning signs also exist for many investment scams.
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 BCSC’s online complaint form.
InvestRight.org is the British Columbia Securities Commission’s investor education website.