Without much Wall Street fanfare, Initial Coin Offerings (ICO) is driving a wedge in the start-up investment landscape, collectively absorbing some $200m (£160m) in 2016 alone.

ICO is a new form of fundraising, somewhere between Kickstarter-style crowdfunding and VC investment, which is used by blockchain start-ups to fund their projects through the public presale of crypto-tokens to enthusiasts and investors. Tokens are made available on the bitcoin or ethereum blockchain and offered for purchase for a limited amount of time. ICO durations are usually limited by a deadline or a cap on raised funds. Organisations either set a static price on tokens and issue tokens as money is poured into the ICO, or they issue a static number of tokens and determine token value based on the amount of funds raised.

ICOs are different from IPOs because they take place before a company has any real product or service, and they're different from traditional crowdfunding because rather than being a donation, they give participants a stake or a form of ownership in their respective companies and a right to vote on decisions and actions taken in the future.

There's also a lot of debate over the legal classification of blockchain tokens. A joint paper published by Coinbase, Coin Center, Consensys and Union Square Ventures offers guidelines on determining whether a token is a security, but stops short of making any clear cut assertions.

Are ICOs scam?

Many blockchain start-ups have managed to raise millions of dollars through ICO with little more than a white paper and a website.

However, as a considerable number of projects have failed to deliver on their promises, skepticism is developing around ICOs, and many experts are calling them off as complete scams.

"ICOs operate on the incorrect assumption that there is a new class of investment product — the crypto-token—being a Bitcoin-like data format which can be used to manage a fully decentralised blockchain system, meaning that nobody is in control," says Preston Byrne, COO at blockchain application platform Monax, and a vocal critic of crypto-tokens.

According to Byrne, many "coin offerings" run the risk of being seen as closer to Ponzi schemes of the past than they are to legitimate investment products of the present-day. "Draping an investment scheme in advanced cryptography and Silicon Valley futurebabble won't change that," he says, adding that: "I'm frankly stunned that some of the best minds in venture capital can't see what's right in front of them for what it is."

Part of the blame goes to the nature of blockchain itself, which is opening windows and creating opportunities that weren't available before and are still hard to understand.

"There seems to be a real potential for a start-up to short-circuit the whole VC process and 'sell' the idea directly to potential customers," says Tim Zagar, co-founder at ICONOMI, a blockchain-based fund management platform. Zagar also points out that cryptocurrency technology allows services to "bundle" the payment mechanisms, payment tokens and the service itself in a way that was just not possible before. Zagar's own start-up managed to raise more than $10m in ICO earlier this year.

However, Zagar stresses, not every start-up knows the tricks of the trade. "Very often, blockchain start-ups are amazing technology teams that lack business experience which leads them to underestimate the value of market research, sales or even a good revenue model."

"It appears that many of the groups running crypto crowdfunding/ICOs/crowdsales are often deliberately giving outlandish promises with the goal of collecting as much funds a possible, without considering the long-term trust implications, especially for people watching from outside of the crypto-economy," criticizes Stas Oskin, core developer at WINGS.ai.

As a consequence, Oskin says, this can lead to tarnished brand images for these projects, funding difficulties in the future for the teams involved, but also an overall impression that the space is just too early to get involved in.

Investors too lack in knowledge and experience when it comes to evaluating ICOs and crypto-tokens, a view that is shared by a large number of blockchain experts.

"There is definitely a herd-like mentality with people following the herd, without really looking into project details," Oskin says. "Many do not perform much — if any — due diligence, and tend to view their investment as a speculation, often selling their coins immediately once they hit the exchanges."

"Crypto enthusiasts have experienced significant gains from BTC and ETH recently and are now overweighting vision and underweighting execution when making investment decisions," says Nick Tomaino, blockchain expert and principal at Runa Capital. "These fundraises are getting done based on vision rather than any semblance of execution. This has been a problem on Kickstarter for years and I'm fearful we're going to see a lot of the same in the ICO world."

Is it possible to evaluate ICOs?

So how can you evaluate a crypto-token and protect yourself against the possible failure of a blockchain project?

"You can't," promptly replies Byrne, the crypto-expert from Monax. "Real investments are legal in nature in that they specify the rights and obligations of the parties to them and have to follow certain, entirely arbitrary formalities to be valid and binding — formalities which, it should be noted, have been designed in order to protect the public from myriad investment scams that have come into being over the last 300 years."

And they rely on the judiciary for their enforcement. If the issuer fails to meet investors' expectations, such as failing to repay a loan, investors can take the matter to court.

"Tokens, on the other hand, usually disclaim that any legal relationship exists between the token-seller and the investor at all," Byrne says. "Meanwhile, their promoters expressly or impliedly make it known to investors that profits may be expected from the scheme."

However, others believe that some level of order can be brought to the crypto-token chaos.

Tomaino, the investment expert from Runa Capital, believes entrepreneurs and users should establish a set of rules to evaluate and grade all crypto-token-based projects. Tomaino's essay Discussing Cryptotoken Best Practices introduces six general guidelines, centred on transparency, viability of concept and funds control, that can define how likely it is for a crypto-project to succeed.

Recently established ICOrating is a platform that offers analytical research and assessment of ICO projects to potential investors. The organization's website presents a list of crypto-token projects along with their details, ICO progress and level of integrity based on the analysis done by the company's experts.

ICONOMI has initiated a programme to protect ICO investors while helping projects clarify their business proposition and business plan.

However, some of the more interesting initiatives are those using blockchain's own democratized nature to create transparent token evaluation and project development platforms.

WINGS is trying to achieve such a goal through its blockchain project creation and management platform.

"It can be hard to trust random analysts on the web, which may not have their incentives aligned with an individual," says Dominik Zynis, communications lead at WINGS. "The most important factors as always are understanding the team, the technology, the market potential and the timing. That can be really hard — if not impossible — for someone who is not crypto-savvy."

WINGS provides project teams with a toolset to run cryptocurrency crowdfunding and uses crowd intelligence and financial incentives to signal the sentiment of the crypto community toward projects. The platform enables the community to evaluate tokens via forecast markets, and gives accountable and transparent incentives to analysts for the accuracy of their forecasts.

"By making it worthwhile for participants to forecast the funding potential of projects and their ability to achieve milestones, and by helping filter out low-quality and spam projects, the participants are helping each other come up with answers based on the concept of swarm intelligence," Zynis says.

Another notable company is Adel, a self-regulating blockchain start-up incubator soon going into ICO, which intends to launch a community-based ecosystem founded on the Nxt Blockchain-as-a-Service platform, which aims to develop, support and fund blockchain projects.

Members can introduce their projects to the Adel community and get help on solidifying their proposals for funding. The Adel team will advise projects in various fields such as finance, marketing, tech, and law.

The company describes the platform as a "decentralized alternative" to traditional venture capital funding, angel investments and other established financial sources.

It might be too soon to determine the fate of token sales. But as trends show, despite conflicting views, crypto-token investment is likely to grow in the coming months. As the kinks are ironed out and self-regulation and innovative platforms make them more stable, expect ICOs to one day become a real rival to traditional investment.