Initial coin offerings (ICOs)

Investment or scam?

Initial coin offerings (ICOs) are a way for developers of blockchain technology to raise development funds. ICOs have been used to raise hundreds of millions of dollars for blockchain-related projects, often with limited information about their goals.

ICOs may look attractive, but they are high-risk speculative investments where you could lose some or all of your money if the project fails.

What is an initial coin offering?

An ICO is a way projects can raise money over the internet. You invest in them by sending virtual currencies, such as Bitcoin or Ethereum, to a blockchain project, and in return you receive digital tokens related to that project. ICO tokens are held in a digital wallet similar to those of virtual currencies. Some projects may also accept fiat currency such as Australian or US dollars.

ICOs sounds similar to IPOs (initial public offerings), however they aren't the same and usually don't offer any legal rights and protections, or claims to any underlying assets. Offers of shares in an IPO do offer legal rights and protections.

ICOs use the internet to raise money, but they are not the same as crowd-sourced funding which is regulated under Australian law and offers basic investor protections.

Are initial coin offering tokens the same as shares?

Unlike shares, most ICO digital tokens do not come with ownership, voting rights, or even a promise to share in future profits. ICO tokens generally only give you access to the platform or service the project is developing, which could take months or years to function.

Some ICO issuers offer tokens that look or act like shares in a company, in that they promise ownership rights or future payments. Most shares in Australia need to be offered to investors using a prospectus. If there is no prospectus for a token offered under an ICO, it is probably not giving investors the same rights as a share or it may be operating illegally in Australia.

Investors have basic protections if they invest in companies that have a prospectus but this may not protect you if an unscrupulous ICO operator creates a fake prospectus that does not comply with Australian law.

Is investing in tokens the same as investing in a managed investment scheme?

Some ICO tokens could represent units in a managed investment scheme, which is regulated by Australian law. Most units in a managed investment scheme need to be offered to Australian investors using a product disclosure statement (PDS) as this gives investors some basic protections. If the token has no product disclosure statement it may not give you the same rights as a unit in a managed investment scheme or it may even be an illegal offer.

Also some product disclosure statements from ICO issuers do not comply with Australian Law and so offer you no protection.

Check for licences or registration in Australia

You can check whether an ICO issuer is a company registered in Australia by doing an 'organisation and business names search' on ASIC's registers. You can also check whether an ICO issuer has a licence in Australia by selecting the 'Australian Financial Services Licensee register' on ASIC's professional registers.

If the company is not registered and does not have a licence in Australia you will have little protection if things go wrong. But even if the company is registered in Australia, or has a licence, there are risks associated with investing in ICOs.

What are the risks of investing in initial coin offerings?

ICOs are highly speculative investments that are mostly unregulated, and some have turned out to be nothing more than scams. Token values can fluctuate drastically and it's possible for a computer hacker to steal them.

Before you decide to invest in an ICO you'll need to do a lot of research to ensure they are not a scam. Look for forums or websites that explain the products in detail and present a balanced perspective.

Initial coin offering scams

Because ICOs are sold internationally, online and usually paid for with virtual currencies, it is difficult for regulators to make sure proper investor protections are in place.

Some issuers disappear as soon as they've finished fundraising, which means that these types of ICOs are actually scams. When this happens, investors have very little or no chance of getting their money back.

Initial coin offering tokens can change in value

The value of ICO tokens can change very rapidly and they are often highly correlated to other tokens. This means that their values tend to go up and down together, even if the projects they are funding aren't related to each other. Because of this you will not be able to diversify your investments by buying different kinds of ICO tokens.

The technology behind ICOs and the potential uses for the technology are in their early stages, so token values fluctuate due to their popularity rather than any real underlying value.

Your money could be stolen

Just as your real wallet can be stolen by a thief, the contents of your digital wallet can be stolen by a computer hacker.

Your digital wallet, where your ICO tokens are stored, has a public key and a private key, like a password or a PIN number. If hackers steal your ICO tokens you'll have little hope of getting them back. You also have no protection against unauthorised or incorrect debits from your digital wallet.

If you choose to keep your tokens on an exchange they can still be stolen if the exchange is hacked. There is a history of cryptocurrency exchanges being hacked and users losing all of their funds.

ICOs are highly speculative investments in blockchain technology projects. While the potential returns may look attractive, these types of fundraising projects are mostly unregulated and the chance of losing your investment is high.

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Last updated: 10 Nov 2017