How To Differentiate Between a Legitimate ICO and a Scam
Within the past year, the opportunity to invest in blockchain startups opened to the general public through Initial Coin Offerings (ICOs). This sparked a significant amount of interest and excitement all over the world, while also opening the doors to scams and fraud.
Although a technical background and/or in-depth knowledge of blockchain technology is needed to understand the intricacies of many of these new solutions, there are certain precautions potential contributors should take before investing or contributing to an ICO.
Here are four questions to ask yourself — even if you have limited understanding of blockchain technology — to help differentiate between a legitimate ICO and a potential scam:
(note that some ICOs offer utility tokens and others offer securities tokens — they don’t share the same attributes and regulatory requirements)
Does the team and its member’s experience seem legitimate?
One of the first steps to take if you are seriously considering joining an ICO is to thoroughly vet the company’s team and the team member’s experience. While you may need to put in a solid chunk of time to properly vet a team, some red flags will likely pop up once you do some digging.
LinkedIn and Twitter are good places to start your research. Don’t simply verify that the co-founders and exec team members have Twitter accounts, take it a step further and read comment threads, check out who they follow, and scan the content they’re sharing with their followers. For LinkedIn, check out each member’s past experience, connections, activity, and recommendations from previous co-workers is also helpful. Ideally, you’d be able to verify information listed on LinkedIn, like a previous employer.
Keep in mind that it’s entirely possible to fabricate online personas. Fake LinkedIn profiles and Twitter accounts are widespread. During your research, if something seems off, it probably is.
How will my funds be used?
An ICO is typically accompanied by a clear outline providing an explanation of how funds will be allocated. For example, dubtokens breakdown covers protocol development, legal, marketing, business development, and more, and is available to the public in a pitch deck which is clearly linked on the dubtoken website.
If an ICO provides little to no information regarding allocation of funds, it could be a red flag.
Is blockchain technology necessary to address the proposed problem?
It is also typical for an ICO to provide use case scenarios where the benefit of blockchain technology to solve the proposed problem is clearly outlined. After reading through these use cases, you should be able to identify why blockchain technology and native tokens/coins are needed for this venture. If it seems like neither blockchain nor native tokens are needed, or the use cases are really stretching to incorporate both without any clear fundamentals, it could be a “sketchy” project.
Does the whitepaper provide sufficient details and information?
An ICO’s whitepaper is the standard source of information that outlines crucial details of the ICO, technology, team, mission, use cases, and many other components related to the project. Evaluating this resource is a relatively quick and simple check to determine if an ICO is legitimate or not. Look for detailed sections likes:
- An explanation of the problem, competitors, and what differentiates the new technology from the current solutions
- How blockchain technology will specifically address this problem and the benefits of a native token/coin
- Advantages to token holders
- Use case scenarios
- Fees and Legal
Some projects, such as dubtokens, will provide a lot more disclosure and details about the project by preparing an Offering Memorandum.
The company’s website should also look and feel professional, with all supporting documents clearly available for the general public. (While there are times when a project may be ‘under construction’ or ‘under development,’ a website and whitepaper should feel professional with thorough information and detailed concepts.)
The most important takeaway is: if something feels like a scam or fishy, it likely is. Do your research! And moreover, please see what others are saying about the project on social networks. Peer reviews are one of the better ways to assess the quality of an ICO.
And keep in mind that it’s still entirely possible for an ICO to be a scam even if you give it a ‘pass’ on all of the above tests. So be diligent but don’t be afraid to support the legitimate ones!
