How I evaluate a Real Estate ICO Project
We are immersing in this crazy space of time called “ICOs”. Welcome to the party!
I’m amazed by the number of people asking in community channels, “when it goes to hit the exchanges?” and not asking or not even concern about the utility of the token itself. If you fall in this category (AKA speculator), stop here because what you are about to read is not for you.
I’ve been criticized more than once for not highlighting Red Flags in Real Estate ICO projects. I’ve explained more than once that I’m not here to warn people or to expose the Bad and the Ugly. Rather I try to share the positive and proactive approach some projects bring to the ecosystem. I consider people around me smart enough to make up their own opinion, and I don’t like to be in a policing mood when writing!
However, for those who might find it valuable, I share with you the method I use to evaluate a Real Estate ICO Project. I´ll walk you through using a hypothetical case using the three-step process which helps me decide whether I participate or skip a Real Estate ICO project.
Red Flags exist in more than one of the Projects around. As Albert Einstein once said
“Don’t listen to the person who has the answers; listen to the person who has the questions.”
… and do your own investigation.
I. Why. What you need to know
The Problem. The Token
Either you are in the field of Real Estate or not, knowledge is appreciated. Several project models related to the industry aim to solve sometimes non-existing problems. If the project does not bring a real solution its usually because there is no problem to solve. Sometimes, the only real problem to solve through tokenization is the inherent nature of the Real Estate property, i.e, the Illiquidity nature of a Real Estate asset.
Just ask yourself if a simple tokenization of Real Estate assets is bringing some usability to the ecosystem other than solving a liquidity problem. Go deeper. Think Sustainable. Stefano Bernardi’s Token Economy publication is a good reading to open your mind.
When it comes to a Fund
Let me repeat what I’ve been saying in several channels and private conversations. “If you do not understand how a Real Estate Fund works, or if you are not familiar with Real Estate Funds, I have no idea how you can evaluate a Real Estate Fund ICO.”
Therefore, let’s start by understanding the real world first before you drop your cryptos into the decentralized paradise. If Funds are a whole new world for you but you still want to participate, think twice.
Security or not Security?
It is important to identify whether an instrument qualifies as an “investment contract” for the purposes of the Securities Act, and therefore subject to certain disclosure and registration requirements in the US. If you came alone here, and still don’t know how to identify a Security, start by reading about the questions on the Howey Test*** and give the corresponding answer based on the project you are evaluating. This one is a good place to start: The Simplest Way to Understand Why The DAO Was a Security
But wait! What if the project is not related in any way to US jurisdiction? Well, just wait for the other countries to follow the move. I am not a Lawyer, and I am not qualified to give Legal advice or interpretation. However, this issue has become part of our Pop Culture when it comes to Real Estate ICOs. Read the source**** and do your own investigation. As a summary, this is one of the best Legal publications I’ve found. It comes from Skadden. SEC Issues Guidance on Regulation of Initial Coin Offerings. Skadden, Arps, Slate, Meagher & Flom LLP. August 1, 2017
II. How. The method
I’m not a Risk Analyst, but I am certainly a methodical person. In order to assess if a project is a good fit for me to drop some ETH or BTC on it, I need to evaluate the aspects I think are relevant. As I’ve said, I consider people are smart enough, so let’s start assuming you’ve already done your homework. You’ve already gone through the basics: checked out the Team, read the Whitepaper, understood the Business Model, Token distribution, Advisors and Legal framework. If you want to perform a detailed Risk Analysis, you may check The investment appraisals developed by ICORating.
What I do in practice, is applying my own method based on an adaptation of
1) Concept Testing and
2) A rating (reputation) based on Net Promoter Score (NPS) Index methodology.
The Concept Testing* is used for Go-to-Market Product. It is the process of using surveys to evaluate consumer acceptance of a new product idea (prior to the introduction of a product to the market). Most of the ICO projects have a curve of adoption which makes it suitable for this analysis. For more accurate results when applying the Concept Testing you can use qualitative methods, but it would be too much to immerse at this point. As a matter of fact, when you join a community you are doing so in an empirical way. So, let’s keep it simple this time.
After I have the Concept Testing outcome, I apply the Net Promoter Score Index to each project. The Net Promoter Score is an index developed by Fred Reichheld, Bain & Company (originally ranging from -100 to 100 ) that measures the willingness of customers to recommend a company’s products or services to others. It is used to evaluate the customer’s overall satisfaction. Customers are asked one question to rate their likelihood of recommending a company to a friend. The number on the scale that a customer chooses is then classified into one of the categories: “Detractors,” “Passives,” and “Promoters.” I use this methodology to give a “reputation rating” to Real Estate projects which eventually makes easier for me to decide whether I support or not the project.
The Three Charts
By implementing this adaptation of two Market Research methodologies, I complete three charts:
1. The “Homework” chart with the project name and basic information.
2. The “Concept” chart with questions apply to an individual project.
3. The “Rating” chart with a final number assigned to each project.
As of today, I have a chart of 26 Real Estate projects. My chart includes pre-ICO, post-ICO and even some others you may not ever hear about but they are companies running and operating. If you are surprised by the figure, don’t worry. I’m a freak when it comes to Real Estate on the Blockchain.
III. What. The Questions
Keep it personal
What I evaluate is a matter of personal understanding of what Decentralization is, years of experience and International practice in the Real Estate industry, and my own risk tolerance. Based on that foundation, I elaborate a number questions. I formulate those questions as closed questions (yes or no). By this, I eliminate the subjective nature of the answers, especially when you get to know the Team or when the Team is close to being lovely.
Questions and answers
I list six topics, and each one has a set of three questions. There are actually two paths or ways to work on this chart. The Classic one (see image 2 below) with answers ranging from 0 to 5, that is the longest route
And my Adaptation of Yes or No to “eliminate the subjective nature of the answers” as shown in image 3 above. That’s the shortcut, the questions are the same, let’s work on this one. Here is my Concept chart:
I look into two questions during my “homework process”. If any of these answers is an absolute YES there’s no need to go to the chart. It’s over. Equals rating “0”. These questions are:
· Does the Token Sale proceeds aim to purchase a property?
· Is the Token clearly, obviously and under no doubt classified as a Security?
The case of XYZ
To illustrate the process, let’s take a hypothetical Real Estate ICO project called “XYZ”. If you already have a real one in mind, I suggest you pick that one and answer the questions. Let’s work on the shortcut chart. The values are for YES = 1, for NO = 0.
XYZ is a worldwide real estate marketplace to enable the purchase of international real estate online, offering a global land registry for governments and organizations. XYZ Token will be used to activate the registry of properties on the platform. The governments around the world will benefit from XYZ decentralized platform.
For a “perfect 10” on the concept chart, the project should get a score of 21 points (21 answers YES)
Now, with a result -5 over 21 — Outch! — Let’s give XYZ project a value on the Rating chart:
By using this three-step method, I can decide where my cryptos should go. Just take a look at the Rating Chart. It is a summary of projects and their reputation. Would I contribute to XYZ? I don’t even have to spend more time on that. Obviously, No. Should I leave the project community and warn all the people around about Red Flags? Not really, I would love to see how the project evolves.
The Token Market is still developing. Therefore, no one here may be called an expert. Do not expect the perfect answer from any Team. Expect, however, an answer. And be open to discussing. Sometimes improvements are made on the road, but you have to be able to listen and collaborate.
Finally, when analyzing an ICO project, forget everything I have said and just ask yourself: Do they really need to issue a token?
Join the conversation bringing your feedback and any ideas to improve. We are all “trying out new concepts or ways of doing things” = experimenting.
*Ling Peng, Adam Finn (2008) Concept testing: the state of contemporary practice. Emerald Group Publishing Limited, 2008
*Tony Ulwick (2002). Turn Customer Input Into Innovation. 2002 Harvard Business Review
***Marco Santori. Oct 15, 2016. Appcoin Law. ICOs the Right Way. Coindesk.
***U.S. Securities and Exchange Commission, July 25, 2017. Investor Bulletin: Initial Coin Offerings