Potential investors typically purchase coins at an ICO using a different cryptocurrency or fiat money. The sale of tokens at an initial coin offering may represent a share of the company or a revenue share. However, these sold tokens may have no practical value. Before the event can take place, there’s a compulsory set of initial coin offering documents that should be reviewed by the investor to avoid losses to fraudulent startups.
What should be Disclosed in an Initial Coin Offering?
In the United States, ICOs are currently being regulated by the Securities Act. However, the required disclosures and regulations were crafted about 70 years ago, so the laws do not factor in the advanced technologies in our current world. Right now, the initial coin offering guidelines only provide a partial solution to the disclosure issues in ICOs. Even with the regulations in place, it is uncommon for companies to disclose the elements that impact the price of their tokens.
Although the ICO tokens are held within the basic laws of finance, their economics demonstrates the need for a better-suited set of laws for their disclosure. Some of the things that should be disclosed in an ICO include the demand-side and supply-side factors. The standardized “full” disclosure model for all securities offerings requires the input of the following;
- Financial statements
- Token description
- System of on-chain governance for the blockchain project
- Technology and management teams of the project
- Secondary trading (listings on other exchange platforms)
- Risk factors
What are Initial Coin Offering Documents?
If you’re a complete newbie to the crypto space, you may assume that a project’s whitepaper is the most relevant of all initial coin offering documents. That fact doesn’t reduce the importance of other ICO documentation. Potential investors will only get the complete picture of a business deal with a blockchain initiative by consulting a set of documents which are;
1. Whitepaper
A project’s whitepaper is the central document in an ICO and it covers three main aspects; token description, business model description, and the details of the core team members. A top-notch project team will ensure several translations of their whitepaper. For most ICO investors, the whitepaper answers the question: is an initial coin offering legal? However, there are more documents to watch out for.
2. One-pager
As its name suggests, this is a one-page overview of the start-up organization in the ICO. A one-pager essentially serves as the project’s elevator pitch which is the company’s effort to convince a venture capitalist that the network protocol is worth investing in. It is accessed by the whitepaper and should establish the token’s economy in terms of demand and supply. The one-pager should also illustrate how the real-world demand for the token will be generated as well as in-depth profiles of the foundational team members.
3. Presentation
The presentation comes in handy in informing the investors and token holders about the objective of the blockchain network and the position of the token in all of it. Potential investors typically treat the presentation as the thesis of the project, and rightfully so.
4. Landing Page
This is the company’s online presence and it’s usually structured in the form of links. These links are the direct entry points for investors and enthusiasts who are looking for the project’s basic documentation including the whitepaper, presentation, and one-pager.
5. Legal Advice
Blockchain tech startups must have a legal team that provides an informed opinion on the token before the ICO. This legal advice best resolves the question that most investors have about startups: is an initial coin offering legal?
6. Issuer Registry
The purpose of the provision of the issuer registry is to authenticate the originality of the project by confirming the registration status of the token’s issuer. Furthermore, this gives the investors sufficient information on which jurisdiction the network protocol will operate under.
7. Promotional Documentation
The promotional materials provide insight into the effectiveness of the project’s marketing team. It usually entails links to separate sources including their official social media accounts/communities, positive feedback, roadshows, and publications. Investors are also typically advised to watch out for the company’s fund distribution scheme in this section.
8. Technical Documents
Sometimes referred to as ‘yellow paper’, this kind of documentation shows the proposed development for the project. Any investor or enthusiast can find this document published on Github as the source code for the project’s smart contract. Interpreting technical documents usually requires the aid of blockchain experts.
Reasons why Initial Offerings are Risky
Before investing in any ICO, you should understand that it’s possible to lose all of your invested capital as it’s a high-risk venture. There aren’t enough initial coin offering guidelines that protect investors from losses.
1. Incomplete Documentation
Many projects usually lack a complete set of initial coin offering documents. This document can be inadequate or misleading since it’s not subject to any legal principle.
2. Technology Risk
Most cryptocurrencies are developed on blockchain technology that could be experimental without sufficient testing. This could lead to both IT problems like hacks and coding errors, as well as financial issues.
3. Unpredictable Future
Initial coin offerings are usually organized for new projects with growing business models. So the profitability of these ventures is not guaranteed regardless of their promotions.
4. Risk of Liquidity
There are usually limited opportunities for investors to trade their purchased ICO tokens for a legal payment method. Hence, investors will likely have issues in liquidating the value of the coins. Furthermore, trading platforms for the tokens lack serious laws and regulations similar to that of securities exchanges.
5. Risk Of Fraudulent ICOs
Since the nature of the promised service or share in the company profit can be ambiguous, some fraudulent companies promote tokens that turn out to be useless. In addition to that, these cryptocurrencies do not come with any form of a deposit guarantee scheme and no legal protection for the investor.
6. Absence of Supervision and Transparency
It usually requires sophisticated knowledge of the technicality, initial coin offering guidelines, and risks involved in a project before investing in it.
*If you have any further questions about the issues raised in this article or any further concerns, you have, please do not hesitate to contact Tectum at [email protected] or follow us for more on our social channels.