Certain Things to Ask and Watch Out For Before Purchasing an ICO Cryptocurrency Token

We are in the midst of a giant culture clash in the initial coin offering (ICO) space.

It is a shitshow of tech developers, software coders, sophisticated investors, not-so-sophisticated investors, regulated exchanges, unregulated exchanges, government regulators, corporate lawyers, journalists, and fraudsters. Almost all have competing interests and yet the same motive: MONEY. Although to be fair, government regulators are also concerned about protecting consumers and markets by preventing fraud and market manipulation.

But needless to say, there is a tremendous amount of FUD: Fear. Undertainty. Doubt.

With this in mind, I will be posting a series of articles about these competing interests and how they play out. The goal is to educate, enlighten and empower.

Today though, let's give you a short primer to aid you when considering buying into a token presale or ICO or investing in a token on a secondary exchange market.

First and foremost, you should be concerned about "scamcoins" and securities laws (among other laws like commodities).

Securities laws:

Why should I care?

Securities laws matter in relation to cryptoccurrency tokens because an issuer can't initially sell a security unless it is registered or exempt from registration (i.e. offered through a private placement to sophisticated investors, e.g., "Accredited Investors"). ICO issuers of token-securities who fail to either register or do a private placement face serious legal and regulatory risks; including but not limited to multimillion dollar penalties and disgorgement of money raised in the sale.

Furthermore, if the token is a security, you the buyer may have a "rescission" right (essentially a right to a refund) if the token-security was required to be registered but was not registered or if the token-security was sold fraudulently (including if the ICO issuer made misleading statements or omissions). Even if you the buyer don't plan to excercise your refund right (maybe you like your token and still want it as an investment or to use it), many others are likely to excercise their rescission rights, and the sum total of such demands, coupled with any government penalties can shutter the ICO company and leave your token worthless. Why take the risk? (Rhetorical question)

Another ramification is that you may be in possession of "restricted securities," which should have been registered. YOu are generally required to hold such securites for several months or years, depending on the facts. So in such situations, say goodbye to your plan to lawfully participate in an ICO or presale only to sell the token soon thereafter on the secondary market exchange.

Is the specific token a security?

By now, you should know the Howey Test for determining whether something (i.e. a contract or some other instrument) is a security under U.S. securities laws. Just google it and look for an explanation from a reputable law school law professor or reputable law firm.

Be wary of tokens that look like stock, promise profit mostly from the efforts of others, pay dividends or translate into ownership of a company or some underlying asset like real estate, timeshares, sand, diamonds, celebrities etc.

And keep in mind that EVEN IF your token is a true "Utility Token" and is not-in itself-a security, reckless marketing of the token can make it highly likely that regulators and judges would view the utility token as a token-security. I have seen many tokens that are likely not securities and are utility tokens as an initial matter, BUT upon reviewing the totality of statements made in the marketing materials, websites, whitepapers, press releases and official social media, determined that such utility tokens are likely to be considered a security or are at high risk of being considered a security. Statements stressing the investment value of the token, even if it is a utility token, are dangerous. Statements projecting the future $ or BTC value of your token is dangerous. Ridiculous statements like "Our token is going to shoot through the moon!" is dangerous. You get the idea. Be careful and read before you buy. And to all the ICO issuers: don't make such statements, unless you are ready to accept securities laws applying to your tokens.

Many issuers (and buyers for that matter) are simply misinformed about the law. Many issuers are intentionally misleading you the buyer or are recklessly making statements they should not be making. One big name issuer insists its token is a utility token and its purchase agreement says this is not a security. Those factors and statements don't matter if you are--based on the totality of the facts and circumstances--offering what looks like a security or are making highly promissory statements about the investment value and future profitability of the token to tokenholders and speculators.

I asked this specific ICO issuer to address my concerns, and they blocked me. That should tell you something. Security risk alert is extremely high, as is the scamcoin alert. Which brings me to the second part of this article.

Scamcoins:

1. You can diligence whether a coin is more or less likely to be a scamcoin by looking at the code and github content. If you are not experienced in software coding and/or blockchain coding, you should ask a friend who is to review the code. Having a github and disclosing the code is certainly a nice gesture, but until you actually look at it, you should not rely on it to such a great extent. Furthermore, what is stopping the development team from posting one version on github, not truly keeping such github code up to date, and then releasing a different terrible code down the line when its too late and you are already invested?

2. Ask the development team as many questions as you can think of. I repeat, as many as you can think of. They are taking you money and giving you something potentially less valuable than air, which is also a scarce resource. See how they answer and treat you. Be vigilant for boilerplate answers and gimmicky marketing responses. For example, many ICOs are offering the same innovative idea. I am several ICOs offering the same cool new way to apply blockchain to industry X, Y or Z. Over and over, I see the same value proposition with just a different name, different logo and different people. But almost all of them have a nifty plexus blockchain animation on their website. And almost all of them use team member photos shaped like circles. But seriously, ask them why they are different, how they will address competition (show them the specific competition), and ask what is stopping someone from taking the open source code and forking into something similar? This is an issue with open source tech.

3. Honestly, what is stopping most people from doing that (copying the code or forking)? Oftentimes, not much. Think and ask. Usually an experienced IP lawyer (with experience in open source tech) can help an ICO issuer with such issues.

4. Ask the issuer/dev team if they have retained legal counsel and what the law firm name is.

5. Look at the blockchain protocol development timeline. It is easy for them to post github code of a testnet alpha. I don't think it's a stretch to say that many blockchain protocols will never be fully developed and that many dev teams have no intention to actually develop the clean fully operational version.

6. Ask them why they are domiciled as a legal entity in a different country from the primary location of the issuer and development team (and let me know what you hear in the comments below because I am always curious about this decision). Don't accept "tax" as the sole answer. There is a reason why someone is setting up in Belize, Singapore, Gibraltar, Switzerland, Guernsey etc. even though the actual team is located in a very different country. The team should tell you specifically why that jurisdiction was chosen over another.

7. Lastly, be real and unemotional. Be honest with yourself when it comes to cryptocurrencies. Yess this is a new asset class. Comparing it to other asset classes is helpful but should not be relied upon. BUT IF YOU DO NOT KNOW HOW TO INVEST OR TRADE IN REAL STOCK (EQUITIES) PROFITABLY, THEN YOU PROBABLY SHOULD NOT TRADE OR INVEST IN ALTCOINS OR EVEN THE MAJOR CRYPTOCURRENCIES. It is a very high bar to truly be an expert on blockchain and cryptocurrency (think a select few like Vitalik Buterin and Charlie Lee).

More articles to follow. And feel free to post constructive comments or topic requests in the comments below.