Token sales allow developers to raise capital without the friction associated with traditional venture capital investment. As a force for good, these sales open and democratize a fund-raising process typically limited to insiders. However, they also allow scammers or incompetent developers to extract money from a public that lacks the ability to perform due diligence.

Token sales have played a large role in user adoption of the Ethereum blockchain, and we expect they will similarly help to drive the adoption of NEO. Given this reality, it is important to ask: how can we discourage fraudulent or poorly conceived token sales? It is not possible to evaluate every sale, and we should not be expected to do so given the decentralized nature of blockchain technology. Our approach is instead to set community expectations and increase awareness. With that in mind, this document aims to establish a set of best practices for token sales on the NEO ecosystem. We would encourage the NEO community to be wary of projects that do not follow these guidelines.

The guidelines:

Working demo or proof-of-concept: as in traditional VC funding, a team should not receive millions of dollars without a working demo or proof-of-concept of their technology. Understanding of core technology: besides real code, the developers behind a token sale should have expertise in the technology they are using. This is easy to examine by reading their white paper. Does the white paper lay out a vision backed by such expertise? A poor quality white paper, for example, may simply use many buzzwords without saying anything coherent. We recommend the 0x white paper as an example written by a team with strong technological understanding. Value of token: examine the fundamentals of a token. Is it worth investing in? Why would you expect the the value of a token to increase over time? Counting only on speculative value may not be a good idea. Transparent team: it should be clear who is behind the project, and how they are qualified to make the project a success. Company structure: how is the company hosting the token sale structured? Is it playing by the rules of local regulations? Well-defined and realistic roadmap: there should be a clear timeline for development and evidence that this timeline is realistic (for example, through existing code or past projects completed by the developers). Explicit allocation of funds: how is the project planning to use the funds raised? And does the allocation make sense? Public audit of the smart contract (SC) used for the token sale: smart contract code should be released with a reasonable amount of time for community review before users contribute to the sale. Smart contracts can have bugs, and it is important that the public know exactly what they are contributing to. For example, a public SC would have prevented some confusion about the timing of the second round of the RPX sale. Avoid explicit advertising campaigns: token sales that create web advertisements or engage in heavy marketing campaigns are often scams. Fair token distribution: ideally, tokens distributed through token sales should not be too heavily weighted towards an individual or a few individuals. For example, one large whale (or the developers) should not have ownership of 90 percent of the tokens. Responsible claim of involvement or endorsement: token sales should not advertise the NEO or CoZ name as part of their marketing campaign, or claim that NEO or CoZ had a hand in their creation, unless explicitly given permission for it with an announcement in official CoZ and NEO channels.

As you decide whether a token sale is worth participating in, we recommend you re-visit each of the items on this list. The NEO ecosystem is maturing quickly, and we hope that community members will hold token sales to a higher standard than what we have seen so far with Ethereum.

— CoZ Council