ICOs have provided an avenue through which the general public can invest in Blockchain ventures. The popularity of ICOs in the world of start-ups has been driven by the availability of a wider pool of investors compared to the traditional venture capital process. Additionally, the organizations are able to raise capital without following the stringent regulatory requirements of an IPO. As popular as ICOs have become, they are fraught with scams.
According to Icodata.io, there were 886 Initial Coin Offerings(ICOs) in 2017 and these raised in excess of $6 Billion. This statistic provides evidence that the ICO phenomenon is no longer a peripheral strategy and has started to occupy a central position in the crypto-startup world. ICO refers to a mechanism through which start-ups offering Blockchain-based products and services are able to raise funds by tapping into the crowdfunding concept by selling investor tokens in exchange for capital.
Due to the fact that there is an extremely high number of ICOs at any given time and that Blockchain is still considered to be an early-stage technology, most investors do not have the capacity to conduct effective due diligence on all of them. Consequently, there have been cases where investors have lost money through ICOs which had been specifically designed to fund scams and to fleece investors.
The legal and regulatory framework providing the guidelines for the operations of ICOs has not grown in tandem with this nascent technology. However, lately, ICOs have received a lot of criticism and are under scrutiny from financial sector regulators in many countries. For example, in July 2017, the U.S. Securities and Exchange Commission (SEC) communicated that securities laws may apply to the sale of new cryptocurrency and in December same year, they got an asset freeze order to halt PlexCoin’s ICO.
As ICOs investors and regulators develop tools for due diligence, knowing which red flags to look out for in an ICO can go a long way in safeguarding your hard-earned digital coins. Below, we present 7 of these red flags.
One of the red flags in ICOs is the opacity of the team behind the project. For credible ICOs the developers should be able to publicly provide their credentials and previous experience in cryptocurrency. ICOs investors should carry out a thorough research on the background of the developers and establish their capacity to execute the project.
Perpetrators of fraud make unrealistic claims and promise impossible returns. These include promises for enticing financial gains as the coin prices skyrocket after the ICO is closed. This was the case with PlexCoin who promised over 1,300% returns in 29 days. Other ICO marketing materials or whitepapers may promise impossible solutions using very bold claims about their product while offering no evidence of any new disruptive ideas/features.
One characteristic of many Blockchain projects is that they are open-sourced meaning that their code base is often uploaded to repositories like Github or Sourceforge. If a project has promised open-source code and yet its repositories in Github are either inexistent or empty, then this is a red flag for scammers.
5. Fake Photos
There is a strong temptation for scammers to create an impression of association/partnerships with reputable institutions or individuals. Despite the availability of software tools to detect this kind of fraud, the use of photoshopped images remains a popular way to create these fake connections. An example of such an ICO scam is Blocksims ICO.
They created fake profiles of investors raving about how great their ICO is. One of the things they missed was that one of the pictures was of a Russian serial killer named Aslan Gagiev, also known as Djako. So another good technique to use is to check their team members profile photos with online facial recognition software.
ICO scammers have a tendency to apply the excessive use of buzzwords in order to sound technical and sophisticated. This is nothing but a trick to enhance the quality of the text while confusing the investors. At the end of it all, such write-ups do not communicate anything sensible to the investors and therefore ICOs with their excessive use should be ignored.
7. Low-quality ICO Whitepaper/Website
An ICO whitepaper or website is supposed to communicate all the details about the project including the project roadmap, application of the funds, team members, technical details, developers’ stake in the project as compared to what is being offered to the public, among other details. When a whitepaper or website fails to communicate these details or is full of buzzwords, there is a high likelihood of possible fraud and you should keep off.