ICOs were all the rage back in 2017 — what do you need to know about this method of fundraising, and how can you protect yourself against bad actors?
How Does an ICO Work?
Many crowdsales struggle to gain momentum at this stage because they lack legitimacy — in 2020, we are a long way from the ICO craze of 2017. The new token could be regarded as a solution looking for a problem. A lack of hype on social media could also make raising money impossible. According to Blockchain Simplified, up to 53.3% of ICO projects failed to close their token sales in 2018.
The Danger of Scams
As the hype surrounding utility tokens surged in 2017, scammers saw an opportunity to hold fraudulent ICOs — and sadly, a lack of regulation meant many managed to get away with it.
Some criminals promised returns from virtual currencies that were simply too good to be true. Even ICO projects backed by celebrities, such as the boxer Floyd Mayweather, were later found to be fraudulent.
Just like any other investment in fintech, due diligence is essential. Before backing an ICO, ask yourself these questions: Does the white paper give you everything you need? Is the team behind this blockchain project credible? Is transparent information provided about the progress of the token sale?
The SEC Flexes Its Muscles
The United States has taken a dim view toward initial coin offerings — irrespective as to whether they were for legitimate projects or not.
Telegram, a popular encrypted messaging app, raised $1.7 billion in an ICO in 2018 for a new blockchain project known as the Telegram Open Network. But last year, the SEC accused the company of breaking federal securities laws by failing to register the token sale. Telegram has now been forced to cough up an $18.5 million fine, and return $1.2 billion to investors.