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Considering contributing to an initial coin offering?

Here are some things you should consider if you are contemplating contributing to an initial coin (or digital asset) offering:

  • Is the ICO or digital asset offering really just a securities offering in disguise? If so, the offer and sale of the digital asset must be registered with the SEC, or offered pursuant to an exemption from registration.
  • Before investing in an ICO, ask whether the digital assets are securities and whether the person selling the assets has taken the securities laws into consideration.
    • A few things about registered and exempt offerings:
      • Information about registered offerings can be found on SEC.gov through the SEC’s EDGAR database. You can search, for example, by company name and see what results may turn up.
      • If the person/party selling the digital assets says the offering is exempt from registration, and you are not an accredited investor, be careful.
      • Although ICOs are sometimes described as crowdfunding offerings, that is not a defined term under the law and so it doesn’t mean much.
  • Ask how your capital will be used for and what rights will be associated with the digital asset.
  • If the digital asset is a security, federal and state securities laws generally require intermediaries in the transaction to be licensed or registered. Visit Investor.gov for more information on investment professionals.
  • Ask about the security of the blockchain and whether the code has been audited, whether the blockchain is open and public, and where the code has been published.
  • Don’t let the technology fool you, you should ask questions and lots of them.
  • Digital asset trading platforms may not be as secure as they advertise and so may be susceptible to fraud, technical glitches, hacks, or malware.  Hackers too can try and steal your digital assets.
  • You may be limited in your ability to recover digital assets in the event of fraud or theft.

Additionally, watch out for these warning signs:

  • Promises of high “guaranteed” investment returns.
  • Offers you receive that were unsolicited by you.
  • If the investment opportunity sounds too good to be true, it probably is.
  • Pressure to buy or fear of mission out (FOMO).
  • Sellers who have no obligation to you under the law.

If helpful, here are some basic concepts that you should educate yourself on before considering contributing capital to an initial coin offering, token sale or related offering:

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