Some Important Facts About ICOs and How They Work

Anyone can hold ICOs

One of the most engaging characteristics of an ICO is that anyone can use this method of raising funds be it an individual, partnership, a company, or even a Decentralized Anonymous Organization. As long as the team (or one person) behind the ICO have the technical capacity to create tokens, no inherent restriction could deny them the opportunity to crowdsource a Bl.

The first Decentralized Autonomous Organization (DAO) has already died. The first DAO which was simply called “The DAO” was launched in April, 2016 and appealed more than 11,000 investors who funded more than $150 million worth of ether to the ICO. The project was a smart contract system built on Ethereum and was to function as a community-managed venture fund but sadly, the DAO got hacked and the project ended after a hard fork was executed to retrieve the lost all their funds.

Application or Utility Tokens

The application tokens work on Ethereum and can be issued on the application layer through smart agreements. They are usually called complex DAPP tokens or complex DAO tokens. These tokens are services or units of services that can be secured. The simplest way to put them in some context is to look at utility tokens as Application Programming Interface (API) keys used to access the service. Utility tokens represent a way to fund projects and are sold in token sales (ICOs) in trading of digital currencies.

Asset-backed Tokens (and can be Tokenized Securities)

These tokens are the digital form of physical assets. They can be issued onto a Blockchain by a company for later saving. All transactions of these tokens being passed between folks are recorded on the Blockchain. To claim the benefit, the token owner sends it to the issuer, and the issuer sends back the asset.

It is very important to note that tokens can represent any asset: an insurance policy, a fiat currency (dollar, pound, euro, etc.), a promise of a product during a crowdsale or more.

Red flags exist

When it comes to ICOs, the typical dialogue concerns picking out the “right” (potentially most successful) token launch. And no one seems to be talking about the less sexy but equally important or maybe even more so aspect of not falling for a fraud. It is becoming apparent that the current “cryptomania” has attracted a wide range of individuals, from those truly in awe of the new technology, to opportunistic con artist’s keep on making a quick profit. Are there any caution signs you should look out for? Yes, but they are very subtle.

Lack of publicity. There could be several possible reasons causing the shortage of publicity:

  1. a) The project is still very new and the media has not picked up on it yet;
  2. b) The project is not very engaging or has little potential;
  3. c) The people behind the ICO project do not want the publicity to avoid being snuffed out when the eventually make a run for it. As just one piece of a puzzle, this factor will give you further insight when you combine with other red flags (see below).

Not disclosing the team: While the team running the ICO list is not usually required to identify themselves, it is more than cheeky to ask for funding without even showing your face. It should immediately be a scorching-hot red flag. Is the team hiding because they are not qualified for the job? Or are they linked to past crypto frauds? Do not follow the crowd, Do Your Own Research DYOR!

ICOs are not legal everywhere

China was the first country to ban ICOs, stating that the fundraising method has “seriously disrupted the economic and financial order.” A committee led by China’s central bank is due to inspect 60 crypto currency exchanges and produce a report. In the meantime, ICOs are illegal in China.

The forceful measure was driven by concerns that some ICOs are financial scams and pyramid schemes. The Chinese companies are believed to have raised $383 million funds from 105,000 investors during the first half of the year.

Tokens could be securities

There has been quite a bit of confusion covering the utility token issued during ICOs, since the US Securities and Exchange Commission (SEC) announced that any token that cannot pass the Howey result should be considered a security and fall under the 1934 Security Exchange Act. The Howey test consists of the following questions:

Is it an investment of money?

Is it in a common enterprise?

It’s for profits to come solely from the efforts of others?

The universal understanding is that if a token is issued to finance a future customer’s purchase, then it should not fall under the definition of securities because its purpose is to facilitate the purchase.

But then again, other jurisdictions like France, Switzerland and some other countries seem to be showing progress with their regulators being more in tune with the industry in comparison to what pertains in the US. These countries have been working quite closely with the industry and even being engaged first-hand and as such have got a better grasp of the market and this is commendable.

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