The case for regulating ICO's: Risk distortion and failure rates

Unregulated ICO's, in its current form, are bad for crypto. I am not talking about the projects that pioneered the space, but for profit corporations taking advantage of ICO financing over the last 6 months. Why is it bad? It significantly increases the risk/failure rate as it shifts the risk from entrepreneurs to "investors" (who are not really investors since they have no rights or expectations from buying a "utility token" - Don't trust me? just read any disclaimer from any for profit company ICO issues in the last 3 months). It creates a risk free environment for raising capital, and flood the market with regular products disguised as crypto/blockchain, or tenuously linked to the blockchain (Services that do not need their own token but create one so it can justify the ICO). it is being used as a way to fund a venture that would not otherwise be funded, or funded at a much higher cost.

Here is the story of the fictional Golf Club Blockchain:

Mike always had a dream of owning a golf club, but he is broke. Banks and venture capitalists won't invest/lend him any money. So he registers a company called "Golf Club blockchain" with the idea that to play golf in the blockchain golf club you need to have the golf token. There will be a limited number of golf tokens available so once they are sold out people will have to trade to get one. Mike runs an ICO requesting money from retail investors. The terms are:" Mike gets 100% of the equity and 100% of the profits generated by the business including dividends plus 40% of the tokens. The investors get 60% of the tokens, with each token equal to a lifetime membership. You can get as many as you want during the ICO, but after the tokens are sold out there will be no more issued.

All the investors who bough the ICO never played or intended to play golf, but bought for resale/speculation (funding the business and assuming 100% of the risk of failure). Before the ICO, Mike got together with a couple friends (all who got equity) formed a corporation and paid someone to write a whitepaper on golftoken. After the ICO, Mike and team collected the cash and started to look for land, hired a contractor, etc.... after the ICO but before the golf club opens there are no real users. So the original ICO investors have no one to sell their tokens to, so the price goes down as liquidity evaporates (no real users or need for the token because there is no golf club yet), or maybe the price goes up because Mike is a hype machine and announces that he partnered with Coca-cola to serve beverages at his golf club, and with Nike to sell golf apparel at the golf store, and for the short term, investors think that adds value to the golf club.
This lasts a while until the excitement fades and people get tired of the announcements. They drive by the golf course and see a sign that says gold course to launch in 12 months. They drive down the road and see that everyone is getting on this free money ride and there are 5 other golf course doing the same thing...people panic and start selling. Mike doesn't really care because he already got the money, and tells investors that they need to be patient (off course, easy for him to say since he has no personal assets involved in this transaction and while he has tokens, his true value comes from the equity in the business), the investors that do have personal assets involved have no rights because it was sold to them as a utility token. If his golf course opens and he can make a descent living out of it after spending Zero from his own pocket it's great, if it fails due to the competition and mismanagement it's fine too, just do another ICO for a different venture....

This is the risk of this market, specially on for profit companies poorly funded and with no product. It will have a high default rate and high competition, because it is a risk free venture with limited barriers to entry. It encourages careless risk taken because it shifts the loss associated with failure completely to investors and away from entrepreneurs.

Until the golf course opens and people sign up, there is no way to know the fair value of the token, so "investors" are in a catch 22. Now, for the 1 in 10 venture that succeeds, that membership might be worth a lot of money, but with these odds you may well play the lottery. There is just not enough information on most tokens today (since none have a real product and real customers or a real IP) to know the winners from the losers at a price that justify even the current valuations. The investors are investing and holding their tokens mostly based on hope, and not hope that the business do well, but hope that the membership they bought will go up in price and will be a liquid investment. The business might be making money for years until the membership price goes back to the ICO level. Why? Because, another issue with ICO's is that there is very limited information on what factors were used to determined the fair value of the token during the initial offering (done purposeful I suppose so they can be passed as utility token). My best guess is the value was based on what Mike thought he could get. So, if Mike sold 100,000 tokens, but his club only has 10,000 real members after 5 years, that membership price will be substantially below the ICO price even though Mike is doing very well.)

I leave you with this thought. If you are going to invest in something, know the value of the underline asset and the factors that can change your perception, (particular on company owned centralized block chain utility tokens). Otherwise, just trade with your speculative capital. flip ICO's, trade crypto but but have a stop loss order, be ware of the lack of liquidity ( good luck buying $50K into an ICO and trying to sell without tanking the price), and don't listen to investment advice on company owned tokens from someone who is not a true financial adviser. And most important, be aware of any tokens that have gone up 1,000% in price and do not have a real product or a basis for the new valuation ( For profit company issued tokens are not Bitcoin, Litecoin or Ethereum). the cause for the parabolic rise most likely It is either a pump and dump marketing ploy or the token just became really, really overvalued. In either case beware and asks what gives that token value.

No one outside of retail investors would finance any ventures with those ICO terms, so know that you are already behind....