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 money or cryptocurrency to a blockchain
project, and in return you receive digital tokens related to that
project. ICO tokens are held in a digital wallet.
Warning about ICOs
There has been a lot of hype around some popular
cryptocurrencies, but not all ICOs are cryptocurrencies. Some are
high-risk investments in start-up blockchain projects that may be
nothing more than an idea. Some have turned out to be scams. See ASIC's media release on misleading ICO
You could lose a lot of money if you buy into an ICO without
doing your research first.
ICOs sound similar to initial
public offerings (IPOs); 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
What are you really buying
when you invest in an ICO?
ICOs are speculative, high-risk investments. Many ICOs are for
projects that are experimental, are at a very early stage of
development or may not have even started yet. As a result, some
projects may take years before they become commercially viable, if
at all. A large number of ICOs fail or do not increase in
ICO white papers
There will usually be a 'white paper' that provides information
about the ICO and the project it is funding. The white paper
should, at the very least, provide the names and contact details of
the people behind the scheme and information on what they are
planning to do with your money. This will help you conduct your own
research before committing money to the project.
However, the information in the white paper can be unbalanced or
misleading. For example, estimates on profitability may be very
optimistic, or it may explain what the technology could do in the
future without discussing how difficult it could be to develop.
If the white paper claims the ICO is not a financial product,
this may indicate that the promoter is trying to avoid regulation,
leaving you with no consumer protection. These papers can also be
very technical, which may make it difficult to understand what your
rights and obligations will be after you've bought the ICO token,
and what the risks are.
Can I trust what I read about ICOs on social media?
ICOs are often promoted through closed groups on social media
platforms and messaging apps. You may be urged to get in early to
make a profit. You may get the impression that the project has been
endorsed by a celebrity or that it's more popular than it really
is. These types of online claims are really just marketing tricks
to get you to part with your cash. Look for real evidence from
other sources to support any claims made on social media.
Are ICO tokens the same as
Unlike shares, most ICO tokens do not come with ownership,
voting rights, or even a promise to share in future profits. If you
have no ownership rights, you won't have a claim over the company's
assets if it fails. ICO tokens generally only give you access
to the platform or service the project is developing, which could
take months or years to function.
Has the ICO issued a prospectus?
Most shares need to be offered to Australian investors using a
Some ICO issuers offer tokens that look or act like shares in a
company, promising ownership rights or future payments. However, 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; however, this may not protect you if an
unscrupulous ICO operator creates a fake prospectus that does not
comply with Australian law.
Are ICOs managed
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), which
gives investors some basic protections.
If the token does not have a PDS, or does not comply with
Australian law, you probably won't have the same rights and
protections as a unit in a managed investment scheme, or it may be
operating illegally in Australia.
The risks of investing in an
ICOs are highly speculative investments that are mostly
unregulated, and many have turned out to be scams. If the ICO
is issued by an overseas entity, it will be even harder to get your
money back if it turns out to be a scam. Token values can fluctuate
drastically and it's possible for a computer hacker to steal
Before you decide to invest in an ICO, you'll need to do a lot
of research. Look for forums or websites that explain the product
in detail and present a balanced perspective.
Initial coin offering scams
Because ICOs are sold internationally, online and usually paid
for with cryptocurrencies, it can be difficult for regulators to
make sure proper investor protections are in place. It is
often unclear where the entity is incorporated and what laws and
regulations apply to it.
Some issuers disappear as soon as they've finished fundraising,
which is a good indication that it is actually a scam. 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 rapidly. The technology
behind ICOs (and the potential uses for this technology) are in the
early stages of development, so token values tend to fluctuate
based on popularity rather than any real underlying value.
Online applications, including social media and messaging apps,
have been used to push up the price of tokens, in order to sell
them to other buyers at artificially inflated prices. This is known
as a 'pump and dump' scheme.
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.
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.
Cryptocurrency exchanges are generally not regulated like
traditional exchanges, such as the ASX. 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.
An ICO is a highly speculative investment that
could be a potential blockchain project or it could be a scam.
While the potential returns may look attractive, these projects are
mostly unregulated and the chance of losing your investment is
Last updated: 30 Oct 2018