Initial coin offerings (ICOs) have become popular for tech startups to raise money in recent years. An initial coin offering (ICO) is the cryptocurrency industry’s equivalent of an initial public offering (IPO). In an ICO, a company sells tokens to investors in exchange for fiat currency or other cryptocurrencies.
ICOs never had real regulation and could be launched to the public immediately regardless of the status of the product backing it, unlike IPOs which need to meet several criteria before they can access public market capital.
ICOs took off in 2016 and 2017, with everyone slapping blockchain, tokenomics, utility tokens, or tokenisation on their project and rushing to get listings on various exchanges to dump their pre-mined creation and access liquidity from these naive ICO investors.
The tokens are often touted as a way to invest in the future of blockchain technology, but many ICOs are blatant scams.
ICOs are also a popular funding mechanism since you have access to a global capital market from day one of listing and can dump your tokens on a worldwide audience of suckers instead of being confined to a local market.
Why ICOs are a Scam
ICOs come in different sizes, shapes, and colours, but they often fall into one of three categories.
First, many ICOs are simply not transparent. The companies behind them often fail to provide investors with meaningful information about their business plans or financials. This makes it difficult for investors to assess the risks involved in investing in an ICO. This is done on purpose; in cases like this ICO investor is the product, and the ICO issuer tries to get as much for the tokens they’ve created before calling it quits in a sort of long-term or medium-term rug pull.
Second, many ICOs are not backed by any real assets, sustainable cash flow, or value creation. The tokens that are sold to investors are often just promises of future value. There is no guarantee that the tokens will ever be worth anything, and there is no recourse for investors if the ICO fails.
Third, many ICOs are simply Ponzi schemes. The companies behind them use the money raised from investors to pay off earlier investors rather than invest in their business or operations. This creates a pyramid scheme where the only way for investors to make money is to get more people to invest.
What are ICOs used for?
In addition to the reasons mentioned above, there are a few other things to keep in mind about ICOs:
- ICOs are often used to fund projects that are not yet fully developed. This means that there is a high risk that the project will fail.
- ICOs are often very volatile. The price of tokens can fluctuate wildly, and investors can lose a lot of money if they sell their tokens at the wrong time.
- ICOs are not a good investment for most people. They are only suitable for investors who are willing to take on a high level of risk or those who are insiders or insider trading.
- ICOs are used to realise profits without creating a fully functional business.
- ICOs are a vehicle for speculation or profiting off specific market trends. You will constantly see a token tied to a trend, tokens for gaming, tokens for AI, tokens for scanning your eyeballs and the list goes on.
If you are considering investing in an ICO, it is essential to do your research and understand that you’re likely getting fleeced. You’re only putting yourself in a position of holding out for potential new capital flow, hoping a greater fool comes along to make the same mistake you did, and you can sell to them before the project fails.
Why Tokens are Unregistered Securities
In the United States, securities are investments that are offered to the public. They are regulated by the Securities and Exchange Commission (SEC). ICOs fall into the realm of securities as they pass the Howey Test, but they are not registered with the SEC. This means that investors in ICOs are not protected by the same laws that protect investors in traditional securities.
The Howey test is a legal test that is used to determine whether an investment is a security. The test asks three questions:
- Is there an investment of money?
- Is there an expectation of profits to be derived from the investment?
- Is the investment in a common enterprise?
If the answer to all three questions is yes, then the investment is a security. ICOs typically meet all three criteria of the Howey test. Investors in ICOs are investing money in the hope of making a profit. The investment is in a common enterprise because the success of the ICO depends on the success of the company behind it.
Security token offerings already exist
ICOs that do wish to use blockchain technology as a basis for their distribution of a financial contract can do so using a Security Token Offering, the regulatory framework is already available, and the technology to do it exists, even on Bitcoin side chains like the Liquid Network.
Companies could dedicate a portion of their stocks or bonds to be issued on blockchains so they may trade on regulated exchanges or allow whitelisted investors to conduct their own on-chain OTC transactions.
ICOs, however, wish to refrain from following the STO model or registering with a securities regulator because the burden is too much. They will be exposed for showing the way their pre-mines have been allocated, how their cash flow situation works, and who has ownership of these securities.
This transparency would not work for most ICOs as they don’t plan to stick around very long; they only exist because they can profit from access to public markets without needing the burden of proof required by IPOs.
As this reality downs on ICO creators and promotors, with regulatory bodies cracking down, certain projects are looking for ways to get around it.
ICO will lead to your portfolio spending time in ICU
ICOs are a risky investment and exist in a regulatory grey area as regulators are slow to adapt to the changes in technology which is why certain token creators think they can still skirt the lines with clever rebranding and issuance mechanisms, one of them being “Token Sacrifices”.
Typically an ICO has a pre-sale and a public sale at a price set by the issuer and then a later listing on various exchanges where markets are made, and it is allowed to find a price through market trades. Those that got in at the pre-sale price and even public sale would be the liquidity providers who dump on the open market once exchange pairs go live.
In the case of Pulse or Pulsechain, you can’t buy on the open market with an IDO, and you can’t purchase at special rates with an ICO.
Instead, you had to wait for the so-called sacrifice phase to start.
This means that at this point, you can sacrifice all kinds of different tokens to receive sacrifice points. One example of a sacrifice with no expectation of profit is a “burn” event, where tokens are sent to an address with no known private key, effectively destroying them and reducing the total supply of the token.
In this case, you could always rely on the burn address as a way to see if you’re being rugged and that those keys are truly in-active; in some ways, this was very similar to the creation of Counterparty Tokens, a proposed second layer built on top of Bitcoin.
Another example is a donation of tokens to an individual, company, non-profit or charitable organisation, where the goal is to support a cause or initiative rather than to generate profit.
The amount of sacrifice points you receive will be a 1:1 ratio to the amount of Pulse tokens you will get when the PulseChain network goes online. As for Pulse tokens, the sacrifice had additional incentives built in, like getting a preferred ratio if you committed capital earlier.
Either way, the narrative behind this practice is the decision to sacrifice tokens with no expectation of profit is driven by each individual’s motivations and goals, so therefore, it cannot be a security as it fails the Howey Test.
To give you an idea of how silly the idea of no expectation of profits is, according to reports, the sacrificed amount was s now well over $1 Billion dollars from over 115,000 wallet addresses. Now ask yourself, why would 115 000 people commit over $1 Billion Dollars into a network where they have zero expectation of profit?
If they wanted to give money away, why not donate it to charity and at least bank a tax right off?
How dumb do you think regulators are that they won’t see through this? The SEC has taken a dim view of “staking” or investing and alleges that he deliberately attempted to evade securities laws by urging investors to “sacrifice” crypto assets instead of investing them.
Do your own research.
If you want to learn more about token sacrifices, use this article as a jumping-off point, and don’t trust what we say as the final say. Take the time to research, check out their official resources below, or review other articles and videos tackling the topic.