Why ICOs suck
There have been a lot of Initial Coin Offerings (ICO) lately and it might be that most of them are cool and have been issued by honest companies who will make the early investors rich, but it is far from certain.
The information deficit
Looking at an ICO I search for the following information:
Has the smart-contract code been published and can it be verified
What is the governance of the company? How can coin owners participate?
How easy is it for the company to change the contract governing the coins?
How transparent is the decision making process?
What benefits will be given to coin owners?
How many coins are there initially and can the owner mint more tokens without asking?
Most of the time these questions remain unanswered. I guess because the companies have not thought about it enough or because they are deemed unimportant. I believe these are important questions and no one would buy shares with as little information.
The legal protection deficit
I guess (and this is a wild guess indeed) that people just assume that coin owners will be treated like shareholders. This might be the case but there is no obligation on the company’s part to do so.
The only thing that can protect coin owners is the smart contract, because these are not securities and there is no law governing crypto currency coins.
In short: if the company takes off with your money, you may have little legal protection.
The things to know about ICOs
Here is my 2 cents about how to conduct the minimal due diligence before investing in an ICO.
Check the contract
A coin is governed by a smart contract! Check that the address belongs to a contract and that the contract has safeguards. If you are unable to check it for yourself, maybe wait until knowledgeable people have provided an opinion.
Check your rights
The existence of a contract is a good start but a contract by itself does not protect you. It is easy to write a contract that allows its owner to syphon all the funds into another account.
Verify what the company has to say about your rights and then wait for someone to confirm that the contract does indeed protect you as described.
Check your benefits
A coin is no share! If the company wants to compensate its coin holders then it should tell them what the plans are and it should be encoded in the contract.
There is no guarantee that the coin issuer will pay you anything. And you have no right to the company’s assets as you would with a share. If the coin issuer wants to sell the company and pocket all the benefits, you have zero recourse.
Will your coins be diluted?
One of the biggest threats to any shareholder is dilution. This is when more shares are issued in order to raise more capital.
The same can happen with coins. Except that because there is no regulation it might happen in a disorderly manner.
Imagine you bought 10% of the coins in an ICO and then the company issues 10 times the original amount of coins. You now own 1% of the coins. For the same price.
Again, the contract will be clear about how, how many and under what conditions new tokens can be minted. The contract is your friend and your foe. It is your job to find out how much of which.
Before giving your hard earned cash, you should be sure of what you will get in return and demand this information of the company asking for your money.