Understanding Initial Coin Offerings
Initial Coin Offerings (ICOs) are sometimes used by startup companies to raise capital by creating a new virtual token or coin. It is then offered for sale and disseminated to buyers using distributed ledger technology, also known as blockchain technology.
ICOs are different from initial public offerings (IPOs) because, unlike bonds, ICOs don’t involve lending money, and unlike stocks, ICOs generally don’t involve any ownership rights in the company. Instead, these offerings involve complex and highly technical products and technologies that can put the investor at risk of losing their money, which led the Financial Industry Regulatory Authority (FINRA) and the Securities Exchange Commission (SEC) to provide information about the risks associated with ICOs.
What Is An ICO?
An ICO is a new virtual token or coin created by a company seeking to raise money. Most companies using this method have a specific monetary target set as a goal, and the fundraising will remain open until that figure is reached. ICOs operate entirely online, and investors can either use currency issued by a government or other virtual currencies like ether and bitcoin to pay for the new tokens. The SEC touches on the basic concepts behind ICOs in their bulletin released earlier this year.
Warning Signs of Fraud
The warning signs of investment fraud around ICOs follow a similar pattern to other types of fraud with a few exceptions. The key things to look out for include:
- Guarantees of high rates of return. Guaranteed high investment returns are a myth in the investment world and a clear warning sign to look out for. If anyone promises you an investment with low risk and a high reward, chances are they’re either hiding something or outright lying about the offering.
- Sounding too good to be true. In a similar vein, an offer that sounds too good to be true almost always is. In general, the higher the potential return on an investment, the greater the risk associated with it.
- Unsolicited offers. Any unanticipated investment offer should raise red flags. If you receive unsolicited communication about a possible investment opportunity, you could be a mark for a fraudulent investment scheme.
- No income or net worth requirements. This is the area that can differ from other signs of fraud. If the ICO you are considering is exempt from registration, then it will typically require all investors to meet certain net worth or income thresholds. These types of offerings are generally limited to accredited investors who maintain a certain level of income or have a net worth in excess of $1 million – investments exempt from registration that don’t have these requirements need to be assessed with a hearty level of suspicion.
- Unlicensed sellers. Make sure to do a background check on any purported seller and the firm they are associated with. FINRA’s BrokerCheck is a great resource for investors to use when looking into any broker.
- Pressure to act now or lose your chance. Scammers often attempt to pressure potential targets to act fast by creating a false sense of urgency to jump on board before it’s too late. Always take time to do background research on any investment you make before committing any of your hard-earned finances.
If you were the victims of an ICO scam, contact our investment fraud attorneys at Meyer Wilson today. With nearly two decades of experience and more than $350 million secured in verdicts and settlements, you can rest easy knowing that your case is in good hands when you choose to work with us. Call us at one of our offices located across the nation, or send us your information through our online form for a free case evaluation today.