Scammy Waters: The Differences Between an IPO and an ICO

The industry for Initial Coin Offerings (ICOs) has exploded recently. Startups are able to raise money directly from the public, without going through the rigorous process required of venture capitalists and banks. While there are legitimate ICOs, the industry has also attracted many scammers.

Also read: ICO Fever: How Crowdsales Are Taking Over Cryptocurrency  

ICO, Not a Crypto IPO

secAn ICO is often compared to an Initial Public Offering (IPO) for stocks. However, there is a world of difference. While the former uses a technical whitepaper to market to investors, the latter needs a comprehensive prospectus and register with regulators. In the U.S., companies seeking to IPO must file a registration statement with the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), as well as file in the states in which it intends to offer the securities.

With the SEC involved, the overall process can take up to six months for the filing to be effective. During that time, the company’s activities are restricted and they usually have to work with the SEC back and forth to ensure compliance. The burdensome IPO process weeds out most scammers and incompetent actors.

Some are Outright Scams

tim-lea
Tim Lea, CEO of Veredictum.io

Without filing requirements and professional oversight of an ICO, the project founders can write anything in their whitepaper. They often omit, whether intentionally or otherwise, information that is important for investors to judge the project’s legitimacy. Individual investors are left to do their own due diligence and some do not have enough knowledge to make informed decisions.

“Often the investment community has little understanding of the uniqueness of the underlying technology of the cryptocurrency itself,” Tim Lea, CEO of Veredictum.io, noted about ICOs. Individuals “[invest] blindly in the expectation that the coins will have a subsequent, profitable tradeable market on the cryptocurrency exchanges,” he added.

Since some investors do not have enough knowledge to make informed decisions, they invest in good faith but some project founders take advantage of the situation. Defining an ICO as a “cryptocurrency crowdsale,” Lea, said:

A number of crowdsales for cryptocurrencies have turned out to be outright scams, where people promised the launch of a new cryptocurrency but never made good on the promise, absconding with the funds collected during the process.

The scams have made the community as a whole “become increasingly cautious and wary of new coins,” he continued, adding that this could result in the ICO of genuinely good ideas being rejected by the community.

Possible ICO Regulations

outlier-venturesCurrently, there are no laws governing ICOs. However, it might change. A report by Outlier Ventures Research explains the possibility of the SEC regulating the ICO market.

The worse case scenario is that, “Tokens are regulated as securities after a bad actor achieves widespread media coverage and uses a token presale to scam participants out of a lot of money,” the firm wrote. In this case, the SEC would regulate tokens as securities, therefore ending the ICO market as we know it today.

However, Outlier Ventures Research believes it is more likely that ICOs will “continue to operate in a legal grey area.” Eventually, the industry should improve and produce better whitepapers, presale documentation and communication. Once the standards and expectations are raised, the possibility of success for bad actors would be limited, the firm believes.

What do you think of the ICO market? Let us know in the comments section below.


Images courtesy of Shutterstock, SEC, Youtube, Outlier Ventures


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  • Mauricio Villamil

    Well while it is a fact that there are and there will be many scams around ( look for example at the ponzi scheme that is the global banking / hedge fund cartels) , the article leaves an after taste of coming to reinforce the idea that regulation is good and is needed.
    Regulation is there only to insure that the biggest gangsters in the game ( that run the regulating bodies) can get away with murder, remember the still recent banking crisis? where was regulation then?…yes, back then the banking cartel got rewarded for their ponzi scheme with bail outs, that is the tax payers money went to fill the pockets of these gangsters and I am sure to the pockets of some of the regulators.

    Anyone who knows anything can look around and see that the crisis didn’t recede, it has in fact gotten worse and the global banking ponzi scheme it is about to implode yet again, only by now, regulators at a global scale, have passed legislation in almost every country on earth allowing regulators to suck up a percentage of peoples money from their accounts directly to bail out ( reward) the banks for their ongoing scam.

    The article also sounds as coming from somewhere, where someone is worried that their monopoly over money moving ( transactions) is starting to get worried, because people that are “not regulated” are setting up tent to challenge the regulated ponzi scheme (blockchain and Bitcoin peer to peer payments).

    This is something that regulators can do for us: leaves alone, take your expertise and bankrupt another planet, that is where regulators expertise got us, to bankrupcy, just look around.

  • medialAxis

    Perhaps ICOs need to be set up using smart contracts (constructed from a standard set of easily understood ‘smart phrases’) such that the initiators lose out if they do a runner?

  • Whale

    You Personally, did you make findings or research on background data of a company like swisscoin.eu before you posted about them sometimes late last year?, all this kind of post on your website which has been assumed as a high profile authority website and reviews for crypto currencies market must not be abused or misused from you by just admitting or agreeing with people behind such scammy coins.

  • Tracer289

    This is a self regulating environment that no government institution can improve upon.
    .
    A fool is born every minute. We are all foolish until we learn better.
    Those who get suckered in, scammed, or burned will learn a valuable lesson. This small minority may whine and cry about how they got scammed. They might admit their foolishness and learn a valuable lesson. Others will cry out for someone else to step in and “do something”. This is simply shirking ones responsibility to one self.
    This is a “bailout”. This is the patriot act. This is crying out to the hammer of government because a few people got stuck by a thorn. Hammers don’t protect people from thorns.

    Those who learn from their mistakes or more wary will perform more due diligence and check their greed.

    Scamcoins won’t receive the attention or interest they desire.

    Or we could pay millions if not billions to some porn-addicted administrators without skin in the game to dictate behavior to all of us, good and bad actors. To protect the kids no doubt.

    F that.
    The market is the most effective regulator. Self responsibility and due diligence is the most effective regulator. People learning thru there own mistakes, whether it be buying into scamcoins or touching a hot stove. Either learn from others or learn the hard way. It’s not like scamcoins are well documented online at this point.

    Only a fool will suggest that we try to achieve good behavior thru legislation or man made regulation.

    • Mauricio Villamil

      Amen brother or sister or whatever. .