Last year, initial coin offerings (ICOs), or token sales as they are also known, raised more than $6bn. But there are many challenges and hurdles surrounding ICOs, making the risk versus reward calculation difficult for investors to work out.
Below are six things to consider when deciding whether investing in an ICO is right for you, and how to ensure you back the right horse if it is.
1) Invest in an already established product
It is important to consider ICO’s that already have a live platform. This demonstrates the tangible, real nature of the business and de-risks providing funds into an unproved concept. Providing funds into projects with no MVP may also breach collective investment scheme, securities and other regulated services rules in various countries, which can result in fines, return of funds and other business critical impacts.
2) Consider the real team capabilities
When reviewing the team and advisors, consider how many the team actually has. Many ICO’s leverage advisors (who are often paid in tokens) to gain a perception of legitimacy, demonstrate expertise and that there are more ‘hands on deck’ than there really are.
Review the core team and check their LinkedIn’s to verify they are full time on the project and not currently employed elsewhere and not taking any risk while expecting the token purchasers to take significant risk.
Once this is verified and it is understood how many people are actually working full time on the project, look into the advisors and actively question their level of involvement and what they are bringing to the project. The answer of ‘their experience’ is not acceptable, get into the detail of their deliverables in terms of time, contacts and any other relevant metrics.
3) Is the ICO regulated and where is the corporate structure
Numerous countries now have a formal regime to regulate, or supervise, ICO’s in a meaningful manner. One of the outputs of regulation is to keep everyone honest and transparent and to protect the public. Ensure those that say they are regulated, supervised and/or have obtained the necessary regulatory approvals are located in jurisdictions that such information can be verified.
4) Ensure the business holds the necessary licences and permits
We have completed a lot of work with ICO funded gaming business, some decentralised, others centralised. We are obtaining licenses for our clients, but have also seen a lot of businesses in the space incorrectly state they do not require a license due to the decentralised nature of their platform, or that betting is happening in crypto.
This is at the very best naive and absolutely false. Across all industries, decentralisation is not a free pass for regulation. Only those projects that engage with regulation will survive and scale in the long term.
5) Does it actually need to raise the capital in the first place?
A stand-alone pie chart to demonstrate how funds will be utilised is not acceptable for any project. All projects should have a full set of financial forecasts including sensitivity analysis. The sensitivity analysis should take into account the hard cap and soft cap to prove why they need the money and that they can really survive and grow on the soft cap, while still spending funds prudently if hitting the hard cap.
It may be reasonable for not all the data to be shared publicly for some projects, but one would expect simplified versions available for review.
6) Understand the corporate structure
From a Swiss perspective, a Foundation is a perfectly reasonable entity to conduct an ICO, but it is especially meaningful to ensure the crypto received is not treated as revenue and taxed as such. Elsewhere a Foundation makes much less sense.
The prevailing sentiment is that Trusts ensure good governance and protect the locked and vested tokens. However, Foundations have a legal personality and the assets of a Foundation can be subject to legal action, creditors, etc. Therefore, if an ICO is conducted from other jurisdictions such as the Isle of Man, and the idea is to protect a digital asset from third parties and ensure they are held in accordance with the initial wishes as defined in the white paper (often milestone locks), then a Trust with independent regulated trustees is a much more secure solution to protect token purchasers interests.
In this scenario, it is likely a company conducting the ICO, and one should ensure the company is transparent in terms of being in a jurisdiction whereby the directors and shareholders information is publicly available. Even more importantly, check that the company has an appropriate license, regulatory approval or registration to conduct the ICO.
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