How To Tell If An ICO Is a Scam

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, 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.

1. Opacity of the people behind the ICO

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.
In the event that the developers are anonymous, it is advisable to avoid the ICOs altogether. Further, if the developers are not known in the cryptocurrency world or very little is known about them, you may consider reviewing their social media accounts or their contribution in the Blockchain forums such as BitcoinTalk.
An excellent example of opacity of developer is the Plexcoin ICO mentioned above. During this ICO, the operators concealed their identity yet one of them had violated securities laws in Canada and was flaunting a court order barring him from holding a securities offering.
When the list of developers includes some well-known names in cryptocurrency, it is advisable to confirm with them whether they are aware of the project. This would help to eliminate the possibility of imposters hiding behind popular names in the industry.
2. Suspicious claims

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.
In addition, investors must understand that it is not every venture that needs the Blockchain technology and that not everything needs to be decentralized. Consequently, you should evaluate whether the Blockchain or native tokens are necessary for the proposed solution. If the answer is negative, then there is a high probability that the project is a scam or just another solution that does not add much value and thus is not worth investing in.
3. Empty repositories for open-source projects

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.
For technical investors, always check the project code against other existing products. If the project is just a copy-and-paste of an existing product or just offers minimal modifications of existing code, it is advisable to keep off the ICO.
A perfect case of code theft is the battle between Mobilink Network and The brain behind Blocksims had been employed to do some work for Mobilink, but when he couldn’t deliver, he was fired. He later went out to implement Mobilink’s idea using stolen code.
4. Inadequate escrow controls
Escrow is a service or a wallet that acts as an intermediary between the investors and the ICO organizers. The escrow holds the investors’ funds and the vendors should only get the funds after they have delivered their end of the bargain, usually after reaching a milestone outlined in the whitepaper. The escrow service is designed to enhance transparency, security, and confidence of all the players in the ICO.
Where ICO organizers fail to subscribe to escrow services or where the key holders of the multisig wallet are compromised, then becomes a red flag for a potential scam.

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.

6. Excessive use of catchphrases

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.

While there is no foolproof way to shield investors from ICO scam, the above points provide a realistic formula for vetting ICOs. However, as the markets mature and more financial regulators are drawn into the sector, the likelihood of fraudulent ICOs will diminish. Before then, ensure that you undertake a comprehensive review of the ICO before investing.