Initial Coin Offerings (ICO) are the cutting-edge of the crowdfunding environment.
An ICO is one of the easiest and most efficient methods for startups to raise capital for their projects. In addition, it is quite simple for investors to participate in these events.
An Initial Coin Offering usually takes from one to four weeks. During this period, everyone can purchase tokens (representations of value) in exchange of cryptocurrencies (such as Ethers or Bitcoins) or even fiat currencies in some cases (such as Dollars or Euros).
For more information visit: What Initial Coin Offerings Are, and Why VC Firms Care (Harvard Business Review).
In this sense, tons of blockchain projects are rising capital through this method. Here are some examples of projects that have raised capital through ICO:
Melonport: raised 227,000 Ether, which is around $9.4 million at the time of this writing.
Project Golem: 820,000 Ether ($34 million)
Matchpool: 125,081.485 Ether ($5 million)
Aeternity: 110,000 ETH + 270 BTC ($4,5 million)
First Blood: 465,312 ETH ($19,3 million)
Arcade City: 620,000 ETH ($25,8 million)
ICONOMI: ($10.5 Million)
But… All that glitters is not gold. Given the newness and the hype that is raising around this concept, Initial Coin Offerings are a good opportunity for scammers.
In this article, we will explain 10 things you should know before investing in an Initial Coin Offering:
In my opinion, this is the main point to determine if the Project will come to fruition. But, what requirements do the team needs to meet?
Technical solvency. The members of the project should have the proper skills to develop the project. Among other things, most of the technological startups need specific developers, lawyers, business people or marketing specialists. To sum up, we should see if all the roles required for the project are gathered by the team.
Degree of involvement. It is not enough to have a team able to cover all the roles required. A good project needs people truly involved. Some startups have a board of advisors full of high skilled people which are not really participating in the ongoing of the project.
- Information and use case
The information about the project is also crucial. Some startups do not provide enough information about the projects.
The use case of the startup’s project must solve a certain problem. In this sense, large and vague explanations should be avoided. The idea must be explained in one or two paragraphs and then the explanation of the project should be detailed.
- Token (Appcoin)
You should verify that the token you are acquiring in exchange of your investment have an actual usefulness or grant a return on investment.
It is also important to know how many tokens are being issued and how are they distributed. In some cases, if the founders have no tokens, they would not have the right incentives to grant their value.
In this sense, it is a good practice to design mechanisms to oversight further sells of the tokens by the founders.
Having a roadmap is also crucial for the success of the ICO. We need to know the plans and vision of the company before funding their project. The timing is also very important in order to justify the capital required in the Initial Coin Offering.
- Destiny of the funds
Before asking money to the investors, the company should announce how will they manage the capital raised: how much will be assigned to the contractors, advisors, marketing, etc.
All this information should be in accordance with the roadmap.
With this regard, it is a good practice to have some kind of mechanism to avoid massive withdrawals of the capital raised (such as multisignature escrow accounts).
- Community around the Project
A growing community is a good symptom for the future of the project. Getting a network effect once the project is launched is much more easier if there is a lot of expectation about a it.
We have to ask ourselves: What did I knew before: their project or their ICO?
Some startups invest a lot of funds in a marketing campaign related to the Initial Coin Offering but do not provide enough information about the project. So, if they are more worried about the investment than in their own project, why should I invest in them?
There is no need to reinvent the wheel. Code reusage grants that it works well and has been previously tested. It is always better to use a well-known code like the Ethereum Foundation’s multisignature smart contract than trying to implement it by yourself.
The code should also have units tests covering all use cases. This practice usually helps to catch most issues.
We should verify that the code is public and corresponds to the code deployed to the blockchain (i.e. publishing it on Etherscan in case of ICOs launched using Ethereum).
The crowdsale smart contract usually interact with others, and the funds are usually moved to those smart contracts once the capital is raised, for example to a multisignature escrow account. In this sense, we should verify that those smart contracts comply with the same security standards.
This is the match point of the top Initial Coin Offerings. We have seen several cases of hacks, smart contract bugs and other events that implies big losses for the investors.
In this sense, if there is a well-known third party auditing the code of the ICO and also a third-party auditing the balances of the company, we are probably facing a good investment.
- Legal Aspects
And the last, but not the least, the legal aspects of the crowdfunding are also very important. Having good specialists granting the legal side of the Initial Coin Offering make the project much more strong.
On the other hand, the Terms and Conditions of the site are important too (I have seen ICO landing pages without legal terms). If the project goes wrong or there is any problem with the ICO, the Terms and Conditions could help if legal actions are required.
Finally, the project should be legally viable, especially in financial use cases. So, when there are lawyers in the team since the beginning of the project, it seems to be stronger.
To sum up, here are the most important features of an Initial Coin Offering:
GOOD TEAM + GOOD PROJECT + GOOD AUDIT
This list is kept constantly updated. So if you think we have missed something, feel free to comment below.