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
ICOs may look attractive, but they are high-risk speculative
investments where you could lose some or all of your money if the
What is an initial coin
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
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
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
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
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
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
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
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
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
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.
Last updated: 10 Nov 2017