ICO Risks and Opportunities

Business executives have a brand—the amalgamation of their current role, the organization and industry in which they work, their reputation, their contacts, and many other factors. This context denotes an expertise that can be valuable to potential employers, of course, but also to others interested in leveraging the credibility earned by the individual. Enter the ICO project.

Initial Coin Offerings (ICOs), sometimes called crowdsales or token sales, occur when the organization behind a blockchain protocol makes its coins available to its community as a means to raise funds. Some ICOs have little more than a white paper describing what the team intends to build at the time of the offering, whereas others are (much) further along in the planning and execution process.

Some believe these offerings circumvent existing regulatory controls such as securities and commodities laws. The SEC, CFTC, and other US Federal regulatory bodies are starting to differ, as are their corollaries in jurisdictions around the world. The regulatory outlook for ICOs is changing almost by the day, and it is a risk to all involved that must be mitigated and understood—a topic for another day.

ICOs have arisen in recent years as a means to fund blockchain-based projects. Project organizers effectively sell tokens to be used within the project, often long before the means to actually use the tokens has been developed. Ignoring the regulatory morass, billions have been and continue to be raised through this new and different kind of funding mechanism.

Many of these ICOs are raising significant capital on just an idea. To provide credibility to these ideas, some are engaging with seasoned business executives to lend their brand to the project. Oftentimes, these relationships require the exec to simply provide a headshot and bio; in return, the project rains “free money” in the form of tokens to the “advisor.” The executive is smitten with the opportunity to be involved in this emerging blockchain world, as she gains innovation cred in addition to compensation. The relationship also allows her to learn firsthand about this emerging space. However, she should be required to do more than lend her credibility to be valuable. She should be asked to directly engage with the team and project on a regular basis as well.

Given the number of associations I have seen, it is apparent that some executives are blinded by the hype, unable to see that their brand is being used to sell a token. A few projects leverage seasoned executives to help an already promising team take flight. However, as an active investor in cryptoassets, I see far more of the former than the latter. For these thinner projects, those actually doing the work day in and day out lack any credibility, given the vision and ambition set forth; relevant experience rests solely among the set of “advisors” cobbled together.

Evaluation Framework for ICOs

In venture capital, it used to be that a working product was the key for an investment. It has matured in recent years to require product traction too. ICOs go the other direction, starting with the lauded “white paper,” followed by the seasoned advisory board. Little else is necessary to secure investment. However, when I see a project focus all their efforts and resources towards marketing their ICO, I wince.

If a project places a higher priority on marketing than functioning code, run away—fast! If the bulk of the relevant experience of the team is housed among advisors who have little to no day-to-day engagement with the project, keep running. If you are the relevant experience and the first topic is your headshot and not your time commitment, sprint.

For a more detailed framework for evaluating ICO projects, check out Spacesuit X.