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How much opportunity do ICOs offer and how do I tell a genuine ICO from a scam?

In last week’s blog we looked at what an ICO (Initial Coin Offering) is and explored some of the risks associated with investing in a new venture via an ICO.   This week we wanted to balance that viewpoint by looking at some of more positive aspects of the ICO we have experienced from working alongside clients directly involved with Bitcoin and other cryptocurrency and digital currency transactions.

One of the questions we are often asked by client interested in taking part in a potential ICO is whether there are any examples of successful ICOs.  The simple answer is yes, there definitely are.

The first recorded ICO, Mastercoin, managed to raise secure $5m in Bitcoins in 2013 by selling theirself-branded tokens.  In 2014 Ethereum followed Mastercoin’s example raising more than $18m before Waves raised $16m in 2016.

We have also seen project leaders inject additional features into their coins.  Some have allowed their tokens to be exchanged for units of the product in question as well as simply allowing investors to trade them for alternative currencies.  The truth is that as the concept is so new, no hard and fast rules have been written which means the scope of every project is limited by nothing other than the owner’s creativity.  To us, this is one of the reasons why Initial Coin Offerings are such a draw to technology-savvy investors.

As lawyers our priority is always our clients’ best interests so when we are discussing the feasibility of a digital currency-based project we often urge clients to take a very selfish view of the project in question.  We will ask them directly “what is in this for you?”  In the world of ICOs the most obvious personal benefit is that your investment will ensure the planned product launch becomes a reality and once it’s on the market, there is every chance the value of the tokens you bought will quickly rise in line with demand which means that in theory in the majority of cases you will make a short-term profit should you choose to sell. 

If we take the Ethereum’s ICO in 2014 as an example, they sold their tokens for between 30 and 40 cents per token during the fundraising stage. Once their main platform had been launched that price had risen, hitting a high of $19.42 at one point generating return of 6000% for some investors.

But as we’ve said while the theory is that while the majority of projects should make a profit, it is in no way guaranteed and, as price is dictated by market interest and market reaction, there is no legal standpoint to protect you should you not realise the levels of profit you’d expected.

Where we may be able to help however is when the project turns out to be a scam.

As we said last week there is currently no legislation in any jurisdiction to regulate ICOs.  However, understanding that potential investors need to have some security before they make an investment, many of the companies who have sought funding via an ICO have imposed their own restrictions.  While this is an obvious move to secure the trust of the investment community it is also a very clever move on their part.  Without that, they would find it increasingly difficult to secure the funds they need to underpin their future.

Before you become involved in any ICO we would ask you to double-check that those restrictions are in place and that:

  • Your investment is deposited into an escrow wallet and that at least one of the keys to that wallet is held by a trusted third party
  • The company you are investing in has a recognised legal entity
  • A complete set of legal terms and conditions (drafted by a qualified solicitor or attorney depending on the jurisdiction) is provided and countersigned by the company seeking investment

If all of this is in place, we would be able to take the appropriate legal action to reclaim your funds should something untoward happen during the funding or launch stages.

Similarly there are also some tell-tale signs that an ICO could be a fraud.

  • No one has ever heard of the company launching
  • There is no record anywhere on the internet of the company and the innovators/entrepreneurs behind it
  • No escrow wallet is offered and, to all intents and purposes, your contribution is going directly into the pockets of the people behind the project
  • There is no potential to see the business plan
  • There is no potential to see the work-in-progress (WIP) progress

If you recognise any of these red flags, it is probably best to withdraw your interest before you make any financial contribution.

If you have fallen victim to a fraudulent ICO fraud or have any doubts about a company you have or about to invest in or require any assistance with any other dispute related to Bitcoin, Blockchain or cryptocurrency or digital currency, please telephone 020 7792 5649 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

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