Resisting the ICO gold rush

Or: Why you should take the noodles

Image: The ICO: “Start Up, Cash In, Sell Out, Bro Down”

You’ve got a great idea for a blockchain-based startup. You just need the money to quit your day job. You have two options:

  1. Network and pitch until it hurts. Find an angel and get a cheque for $50k, move in with your co-founder, eat noodles for a year while you bang out a product, and hope it’s good enough to attract Series A investment before the noodles run out.
  2. Make a slick video and maybe a whitepaper. Run an ICO, raise $5 mil on the promise of being the next Bitcoin/Eth/DAO, hire a team of developers, move into swanky offices with designer furniture and a pinball machine, eat catered lunches, and fly around the world to exclusive conferences.

I’m here today to make the hard sell. I’m telling you to take the noodles. The ICO, or “initial coin offering”, is way more glamorous. It tastes way better. But there’s a catch. Until investment laws change, the ICO route is just too risky.

Take the noodles. Image: Ninosan on Wikimedia Commons.

Why we have securities law

The regulations around IPOs (and publicly traded securities in general) are really heavy. You have to do tons of paperwork. There’s regulation around what financial information needs to be disclosed, what you can and can’t say in advertising, what you can and can’t say to reporters, and on and on.

This is by design. Contrary to popular opinion, securities law is not designed to frustrate entrepreneurs. This is an unintended side effect.

The rules were written to protect a vulnerable public. Scams against unsophisticated investors are a huge problem. There are lots of people out to steal your grandma’s retirement fund. The regulatory system is there to protect her.

What about angels and VCs?

Getting early investment from VCs or angels is easier to do legally because these investors have more experience and more money, which in theory gives them the ability to do the legwork to pick winners and sniff out scams. The law sets out a framework to give these investors the ability to assume the risk of investing in things the general public cannot. They waive some of their protections under securities law to have an opportunity to buy in to early stage startups that aren’t ready to do a full-scale IPO.

The ICO gold rush

Paying with gold dust in Dawson City, Yukon, 1899. Credit: Wikimedia Commons.

There’s gold in the cryptocurrency hills. Bitcoin and Ethereum have generated a lot of new wealth, and the newly rich are looking for places to put their money. With the collapse of The DAO, the doors opened for projects to put together their own ICOs and plans for funding.

It’s a gold rush, and investors are the ones being mined.

To a founder, ICOs can seem too good to be true. You get access to more money than even the most generous angel will give you, and you can skip the regulatory burden. What’s not to love?

When it works, it can be a good thing for investors who can’t qualify as an accredited investor but want access to the bigger returns offered by early-stage investing.

But gold rushes are risky. Most people lose. The same is true for early-stage investing. Securities law is meant to mitigate those risks for investors, and to limit the biggest losses to those who understand and can afford the risk.

ICOs ignore that protection. I have yet to see an ICO that offers IPO-level disclosures about the investment in question, or even the disclosures that an angel or VC would demand before investing.

Under existing law, most ICOs are plainly illegal.

Terms of Service card tricks: “Get out of jail free” or “Do not pass go”?

ICOs tend to play fast and loose with the law to try to avoid the most obvious regulatory pitfalls. Establishing the company in friendly jurisdictions, inserting terms stating that certain law does not apply or that certain people cannot take part, or coming up with imaginary names for securities are all popular tricks.

But regulators are not stupid. They’ve seen these tricks before. The tricks didn’t work with old technology, and they won’t work just because you added a blockchain and some fancy contractual language. Your Get Out of Jail Free Terms of Service could just as easily turn into Go Directly To Jail, Do Not Pass Go, Do Not Collect $200 million, or at least Go Directly to Enormous Penalties.

Making ICOs and equity crowdfunding legal

ICOs and equity crowdfunding make it clear that the investment world is changing. The possibility of thousands of small-scale investors funding a company at reasonable levels was just not contemplated by existing law.

Laws need to be reformed to allow small-scale equity crowdfunding. That process is already underway in the U.S. and in other countries. In Estonia, legal equity crowdfunding has led to the creation of Funderbeam. These reforms and related projects will give access to capital and opportunities for investment, but without eliminating all the investor protection laws we’ve set up over the years.

Founders beware

Until the legal framework is in place, giving in to the seduction of ICOs puts you and your company at risk of a regulatory crackdown. Founders and non-ICO investors could lose everything to a big penalty.

And that risk doesn’t stop at the company level. Founders and directors could be personally responsible to investors, or even face criminal charges.

So far regulators have taken a light touch, but since The DAO debacle we know the SEC is paying attention to the crypto-equity world, and it’s safe to assume that someone, somewhere is going to get hit with the regulatory hammer. Don’t let it be you.

Investors beware

Investors should also be wary of ICOs.

If you are considering investing in an ICO, remember that the rules meant to protect you as an investor are likely not being followed. This opens the door to all kinds of frauds, cheats, and scams. Even companies with good intentions can wind up misleading investors with inaccurate financials or by failing to disclose material information.

And if you are still determined to put money into an ICO, look at the disclosure requirements for legal equity crowdfunding regimes, and insist that the ICO meet those standards. Failure to meet even those requirements is another giant flashing warning sign that indicates a scam, or at least of a company that is not prepared to deal fairly with its investors.


Until the laws change, founders should resist the ICO gold rush. It’s too risky. Until then, there is lots of angel or VC money out there looking for a project, and you don’t have to be a Silicon Valley networker to get your hands on it—just go to AngelList. You won’t get rich unless you do a real IPO, and you might get really tired of noodles, but you will get to build your idea and do it legally.

And if your idea can’t work without an ICO, maybe it’s not a good idea to begin with.


  1. Disclaimer: I am a lawyer, but I’m not your lawyer. This post isn’t legal advice. If you are doing an ICO, you will probably need one, but it’s not going to be me.
  2. This post was inspired by the recent flood of articles around the legality of ICOs, How to Evaluate an ICO—Part 1, and related discussion on Facebook.
  3. I only mention U.S. law in this post, but regulators in many countries are looking at ICOs and crypto-securities. The regulatory hammer could come from any direction.
  4. Thanks to Trent McConaghy for suggestions.
  5. Edited to fix a few typos and to add a definition for ICO by linking to Outlier.