Our London Correspondent Nick Ayton explores the darker side of the new phenomenon, the now enormously popular ICO aka the Initial Coin Offering and why some services could place you in hot water with a knock on the door at 3 a.m. from the law enforcement…

Bigger than VC

In 2017, ICOs have raised more capital for entrepreneurs and projects than tradition VC seed monies and will pass $2 bln by the end of 2017.

The reason as we know it because largely the process for launching a new token is much faster, simpler and costs much less than traditional means involving lots of middlemen, endless spreadsheets and the founders suffering dilution of ownership and stitched up by expensive debt from banks.

"All good reasons to consider an ICO as the primary source of raising new capital. What can be here not to like?"

An ICO for an ICO

With the explosion of real entrepreneurs and fake entrepreneurs many of whom see an ICO as a path to easy money, offering little or no accountability there is a much darker side emerging…

The ICO for an ICO, yes you heard it right.

Many in the token launch industry try to work together and keep standards high and making sure investors are considered and protected where possible, while the regulator’s naval gaze not knowing what to do or how to sort out this badly behaved control teenager.

But I came across a number of new ICO Platforms in recent weeks that are springing up all over the place staffed by people that clearly are in it for the money. Some don’t reveal who is really behind it and others are charging huge fees for services that don’t make much sense and 90 percent have never lived through an ICO.

But the biggest concern I have is the ‘ICO for an ICO.’ Why?

"To set up an ICO platform doesn’t require lots of capital. It requires knowledge, and deep experience gained from actually having done and been involved in an ICOs."

It takes a clear methodology and process to support the token sale process and an understanding of the pitfalls, regulations and jurisdictional challenges that decide whether or not in a few years you will be enjoying prison food.

So an ICO platform raises money to create or apparently build an ICO platform - the immediate question is why do they need the money? What are you going to use it for? And don’t say marketing? And it is difficult at best to fathom the use of funds given the core of any ICO is the ICO process itself supported by various ICO assets that are deployed on behalf of the client for the duration of the capital raising process.

"ICOs come down to expertise and a full understanding of ‘Tokenomics’ that give life to the smart contracts as inputs that create state."

Beware the ICO Platform that isn’t a platform

Now of course you do have genuine platforms such as Waves that support you to launch a token in a few minutes where you are locked into their way of doing things, and several new platforms such as RocketICO are emerging that offers to automate much of the ICO process to speed up getting yet another token onto the market.

I have to say I am not a big fan of ICO sites that let any Tom, Dick or Harry just launch a new token because it sounds fun and we might make some money when people buy it.

Of course, the harsh reality of altcoins is they launch then crash and burn and having fought hard at great expenses to get listed their fate is an unceremonious delisting or suspension as the token falls to zero.

"But then most tokens have zero value because the founders haven’t built anything people want to buy or simply spend the cash on building software without any consideration for returning value to investors."

The ICO process does not require a platform in the SaaS sense at all. It is, however, a collection of service assets that support the increasingly complex ICO process which is becoming very difficult to navigate successfully for both the advisor and the founding team with a great project. And yes I have come across some amazing projects unlocked by the genius concept of the Token itself.

ICO services demand

"Remember there are 120 ICO scheduled in September alone and another 200+ emerging for the end of 2017."

Demand is very high for ICO services and capacity is creaking at all levels – advisors, smart contracts, PR and Marketing, Crypto Exchanges there simply isn’t enough ICO infrastructure to go around.

And probably that is why new entrants are looking to make a fast buck are emerging who have never done an ICO and yet they are advising people who could end up wearing the flattering orange jump suit talking to their new friend Brian the cockroach.

Beware the ICO expert

It’s like reading someone’s LinkedIn profile where they call themselves a Blockchain expert because they have read a few books and it is the flavor of the moment. An expert! Having never built a Blockchain or worked on a live production system. Well, good luck because I have met a handful of who I consider real experts, primarily the core devs and founders at Ethereum and Bitcoin, and none of them would dare to call themselves an expert.

"Beware the ICO expert, the ICO specialist, the ICO advisory and yes it depends on what role they are playing. Are they handling the end to end ICO process or just the PR and Marketing?"

Sharks of today

The other day I came across an ICO Advisory Services business that does just PR and Marketing offering to support your ICO for between $200,000 and $500,000. Sounds like great value to me, let’s have two then.

PR & Marketing matters but so does understanding where you want to target and focus your budget to reach global crypto investors.

I have found others charge large sums of BTC upfront ranging from 25 BTC to would you believe 50 BTC in today’s money, again not great value for money as monitoring return of PR spend is especially difficult to gauge and spend at this level also does not guarantee success or the amount of capital raised.

I speak to founders all day and every day all searching for answers to get help for their ICO. Sometimes 10 new projects a day come across my desk and last week in a single day I received 44 ICO inquiries for help. But 90 percent is not for real, often too early in their journey, not thought through and others with motives that means I cannot go forward.

"I have spoken to some founders that have been quoted $750,000 to run their ICO for them plus other fees. So it’s happening then, the ICO market is in danger of turning into a feeding frenzy where ‘the sharks are the ones steering what is an already doomed ship out to sea where everyone will be eaten’…"

So how do you swim with sharks without being eaten? I seem to remember an old business book by the same name.

Vulnerable

To demonstrate how vulnerable entrepreneurs are to spending time at one of her Majesty’s Institutions or a more delightful US incarceration facility, I came across a UK start up within days (hours) of launching an ICO that would allow any US investors to buy their tokens, a token that was clearly a profit sharing coin and defined in the UK as an unauthorized financial instrument and a security in the US.

There was no doubt. They were being advised by an ICO advisory company and apparently lawyers. Not only did the founders I spoke with not know about the Howey test, they had no clue of the consequences of allowing an unaccredited US investor to buy what is effectively a security as they were about to press the button on marketing to the US investors.

"It felt like the ‘emperors’ new clothes’ during the Dot Com Bubble where rational experienced business people invested in companies at huge valuations that had little or no sales revenues and made no profits."

Being obvious to many the wheel will eventually fall at some point and value will be destroyed.

No protection

I have spoken to other founders again advised by lawyers that have no underlying security as part of their ICO offering. They were programming their own smart contract logic, that had not been audited and they have no mechanism for preventing certain investor communities from joining their token sale.

They use a single receiving address from a WordPress website that can be hacked in less than 5 minutes. The focus was on getting money through the door but not ensuring the smart contracts were capable of returning tokens to the investor. How about protecting investors money once it is received?

Holding on

This and other examples are a demonstration as to why I don’t think the company raising funds should use the smart contracts they have created even when these have been audited by the community because it isn’t neutral in the sense of looking after both sets of interests, the investors and the company.

"And holding crypto where the founders have multisig means they are acting as a deposit taker."

But the big one for me is I speak with many very intelligent and creative founders many of whom claim their Token is not an unauthorized financial instrument, that it is not a security because they have tweaked the business model and they have found a way of rewarding investors but not using real money. Or deferring the rewards, not calling it a dividend or profit share, innocently delusional in their thinking, and defend the indefensible because they have apparently been advise! I am not coming to visit you..

No profit?

I must speak to five or six founders a day that have convinced themselves their token in crypto economics terms has been created differently that means they fall outside of regulations, that it isn’t a financial instrument and investors don’t get a return.

"And my favorite is “our ICO project is not engineered to make a profit” and haven’t considered what is in it for investors."

Bearing in mind, of course, there are crypto investors that will back any token and my research has revealed only 45 percent of investors bother to download and read the white paper.

Heavens list

Others say it’s OK Nick, our token is unique, we are incorporating in Switzerland and the lawyers there are setting up a regulatory neutral structure. And then we are setting up a Foundation Structure to avoid regulation, we are incorporating in Singapore who just love crypto, no Malta is the answer as they allow us to take investors money and pay it out whilst we pay local tax.

And then there is Gib and Lux that come up in every fourth or fifth conversation.

Prison Insurance

Once again I hope you like prison food and in many of the cases above you may be ordered to return the money to investors at some point.

Where they have rules that allow you to issue an instrument they then seize and shut down after. Are the founders kidding themselves or are there dark forces of the ICO advisory community in background that does not care and just wants the fees from getting the ICO away at all costs?

"Maybe the ICO services should come with Prison Insurance a kind of super professional indemnity."

Let’s face reality. Jurisdiction matters a lot, but most are not sure how to regulate, how to interpret current rules and most will allows crypto activities in some way.

But it is likely they will shut the door soon after and even Singapore the once very accommodating crypto environment is insisting compliance and extra KYC and AML that separates sophisticated and accredited investors from the crowd.

Motives matter

I consistently refused to work with founders whose motives are clearly all about the money, where their projects do not consider investors, don’t have a social impact or benefit and when you speak to them they cannot explain how their project will deliver returns for investors or how the business will be incorporated and the use of funds explained.

Yes, returns! So this means your token is an instrument that bears fruit for investors. Yes, it does. Or does the investors get rewards and loyalty recognition that allows them to spend the tokens on your platform, or allows partial ownership of an underlying asset, delivers rewards that can be converted into financial benefits or god forbid fiat currency.

Instrument, security, instrument, security, instrument, security, loyalty, rewards, instrument, security, voucher, instrument, security…

So investors get nothing then is that what you are telling me? Why would they invest - for love, stupidity (don’t answer that)? What do they get? Oh, I see they get more of your tokens? How marvelous, that are pegged to what exactly that increases the value…? Silence is golden when the founders have their epiphany and realize that all along they have created a financial instrument of some kind.

"A golden moment for me as maybe I have prevented another person from wearing orange, not a good look for most."

Are ICO advisors the new Agents of Satan?

Yes, my day job does involve advising on ICOs, building Blockchains for clients and speaking and writing on the subject.

"Yes I am a massive Libertarian into causes and thus I am not a fan of government, of banks and regulators and yes I push the boundaries to find ways of supporting the people, helping good causes and diluting the negative impacts of bad policy that is designed to keep those in power, in power."

But don’t misjudge my position as sticking two fingers up at regulation! Don’t mistake my position on ICO’s a term I dislike.

It is inevitable governments and their regulators will at some point attempt or partially regulate the world of crypto whether we like it and support or not.

But here is the thing there is existing legislation, rules and regulations that impact ICOs and where the majority under most definitions consider the vast majority of tokens as Collective Investment Schemes because they have pooling of capital attributes, that view the token a Security for no other reason it offers the holder of the ‘token’ some form of financial benefit, reward that cannot be ignored.

Motives, again

Ask yourself, how many ICO Advisors have actually done an ICO for themselves or for others? Very few. Like the majority of management consultants they talk a great game but have never done the job and when things get tough or questioned deny all knowledge… As they say “if you can’t do it, teach it.”

How many law firms have done an ICO, how many lawyers are business people, have the people behind the ICO platform and services done an ICO, lived it, felt it, made the mistakes and aware of all the pitfalls?

"What is the motivation of the people offering ICO services?"

Get rich, support every ICO, never say no or push back on the founders following the money the fees? Do they have standards, ethics, tight processes, are they open and transparent, do they make and talk sense, can you TRUST them?

So what are you getting from an ICO adviser?

You should be benefiting from wisdom gained by experience that may keep you out of prison.

You are getting an open honest appraisal of your concept, the business problem you are solving.

You are having the Tokenomics of your proposition tested as to whether they will work in practice once deployed.

You are getting help that avoids your fund raising from being hacked, trolled and attacked. You are getting direct help on the most effective strategies for reaching investor communities.

You are getting asked tough questions about the utility of your token and the jurisdictional considerations.

You are getting ICO support that can help with KYC/AML and broader compliance initiatives. You are getting access to investors and support with investor comms and outreach.

You are getting honesty that may result in your project being turned down!

"ICOs are a positive force, lets us not allow the scammers, the fake entrepreneurs, the greedy or those that want to distort and take advantage of the excessive demand and short supply benefit from their poorly informed and supported ICOs that one day could put you in prison."

Filecoin in so many ways set a new standard for ICOs crafted by smart entrepreneurs and proper subject matter experts in Cooley LLP, a fully compliant ICO process that brought in the institutional investors, handled by Protocol Labs who have engineered the token launch process to support investors and place their interests first. Along with Chainstarter.org are the first of a new generation of Token launch services that place regulation at the center of what they do, and where the investor is king.

Do you ICO properly, don’t cut corners as orange is not a flattering color

If you want to do an ICO do it properly… Go to people that know what they are doing and check out their track records. Don’t believe because they are lawyers they know the world of crypto as few do. Be realistic as it is likely your Token will offer something to investors which is a good thing, but don’t be convinced you can avoid regulation, few projects have genuine options that can. Very few projects have the genuine quality and structure to be regulatory neutral, and yes, of course, you can create a complex web of companies in offshore domains and duck and dive.

But remember this…

You have accepted investor money, it is not yours. You have set the expectation in your white paper, on your website that you are going to do something great, build a product or service that will be a game changer, improve people’s lives disrupt industries. You have a responsibility to be open and transparent in your use of funds, to show and to demonstrate progress, to communicate with your community that have for whatever reason given you their cryptocurrency in return for a token of value, yet to be created!