January 29, 2019 Practice Points

Tips to Prevent ICOs from Becoming IOUs

An exploration of principles to ensure that your investment does not turn sour.

By Nicole Ponziani and Teddy Brown

Initial Coin Offerings (ICOs) have become an increasingly popular way for enterprises, mainly smaller start-ups, to generate capital. Even large, established companies, such as Kodak, are creating “tokens,” or coins, which they are utilizing as an alternative investment vehicle. KodakCoin is not what comes to mind when the conversation of ICOs are brought up. Let’s explore some of the principles of ICOs that are prudent to apply to ensure that your ICO investment, whether in Kodak or a very early stage start-up, does not turn out to be an IOU:

If it sounds too good to be true, then it probably is.

  • Start by conducting a basic Google search. If bad press already exists, use caution.

Explore the company’s website. The items of note you would want to look for, include:

  • Biographies of the company leadership, including pictures.
  • The company’s whitepaper, paying particularly close attention as to their reasons for entering the coin economy.
  • The terms of the ICO, including sales restrictions for leadership.
  • Does the website match the advertisements surrounding the ICO?
  • Are they in a rush to push out the ICO? Is the media hype around them causing a greater rush?

Are the founders real people with real backgrounds? Check LinkedIn, Facebook, Google, Instagram or other social media sites to verify.

  • Doing an internet search of the company leadership is important. Find the social media pages of the leadership.
    • Take note of Facebook and Instagram accounts in particular. What you want to validate is the fact that the members of the leadership team are living, breathing humans.
    • You will also want to validate that the pictures on social media match those on the company website.
    • In the case of the ICO “Confido”, the biographies listed on the company website were completely fabricated.

 Is there a whitepaper? Does it make sense, is it something that would be beneficial in the cryptocurrency space?

  • Review the whitepaper to find out more about the company.
  • If the company does not have a whitepaper, proceed with caution.  
  • The whitepaper should lay out what the company plans to do, the reasonable time frame they plan to do it, the space in which they plan to occupy, and why an investment in their ICO makes financial sense.
  •  Even if you do not understand all of the terminology used, viewing the whitepaper with some healthy skepticism is prudent.
  • If you, as the investor, do not believe in the company mission or are skeptical of the claims being made, you are likely not alone.
    • Performing some internet research to check out what other people are saying may help you inform your decision.
      • Trusted sites and actual technology publications are best sources.
      • Public message boards and forums may be helpful, but much of the skepticism placed on the ICO itself should also be placed on those posts to open public forums and discussions.

Ask questions, read all the information you can about the company and its executives. If the answers you receive give you pause, take time to dig a little more.

  • Review the terms of the ICO.
    • Look for any disclaimers/waivers mentioned in the terms.
      • If there is fine print, you want to make sure you read it!
      • As many ICOs may be unregulated, be cautious of any ICO that does not spell out its terms/disclaimers. It may eliminate any standing you have should something go awry.
  • Is it a utility token or a security token?
    • If the token is a security token, the token may be subject to regulations.
  • Have they had a legal opinion on that position?
  • Identify if terms are laid out for restrictions on sales for the leadership team.
    • If leadership has the right and ability to sell their tokens at any time, you may find yourself in a pump-and-dump situation very soon.

The items noted above encompass “best practices” but in no way guarantee investment success. Common sense, trusting your gut, and a little sleuthing may mitigate your risk of having your ICO investment turn into an IOU from an internet ghost.

Nicole Ponziani is a manager and Teddy Brown is a senior manager at Aprio LLP in Atlanta, Georgia.

Copyright © 2019, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).