The SEC Is Cracking Down on ICO Scams. Here’s How to Avoid Investing in One.

The SEC Is Cracking Down on ICO Scams. Here’s How to Avoid Investing in One.

The U.S. Securities and Exchange Commission (SEC) has begun cracking down on fraudulent initial coin offerings (ICOs). Here’s how to avoid falling prey to ICO scams.

SEC Cracks Down on ICO Scams

Earlier this month, the SEC announced that it had filed charges against the operators of PlexCoin, a Quebec-based ICO that had raised approximately $15 million despite engaging in a number of questionable practices, including refusing to reveal the identities of the development team and advertising that early investors could net profits in excess of 1,300 percent in less than a month.

plexcoin ico scams
The SEC has labeled PlexCoin as a scam, but investors may never recoup the $15 million they contributed to the project.

The SEC charged operators Dominic Lacroix and Sabrina Paradis-Royer — along with PlexCorps, one of Lacroix’s companies — with violating several federal securities regulations, most notably anti-fraud provisions.

“This…case hits all of the characteristics of a full-fledged cyber scam and is exactly the kind of misconduct the unit will be pursuing,” said Robert Cohen, chief of the Cyber Unit, in a statement posted on the commission’s website. “We acted quickly to protect retail investors from this initial coin offering’s false promises.”

The charges were the first filed by the SEC’s Cyber Unit, a new task force created to protect investors against an array of threats present within the digital ecosystem. However, it represents at least the second case the SEC has litigated against an alleged ICO scam.

In September, the SEC charged Maksim Zaslavskiy, a New York businessman, with committing securities fraud for his participation in two alleged ICO scams, including the widely-advertised REcoin token sale that purportedly intended to invest ICO funds in real estate and, later, diamonds. However, the SEC alleges that Zaslavskiy and the other operators of the Recoin ICO sold unregistered securities that were backed by non-existent assets, ultimately raising more than $300,000 from unsuspecting investors.

How to Avoid Contributing to an ICO Scam

That the SEC is beginning to crack down on ICO scams is a positive development for token buyers. However, these two token sales likely represent just a small fraction of the total number of ICO scams that currently pervade the market, and investors should not contribute to projects blindly, assuming that the SEC will shut down fraudulent projects. Rather, token buyers should take an active approach to their participation in crowdsales.

Avoid the ‘ICO’

The first step, somewhat ironically, is to consider avoiding projects that use “ICO” terminology. As Jon Creasy explained in a recent article, one reason that ICOs fall under SEC purview is that they market themselves as unregistered securities — a practice that is at best an inadvertent violation of federal regulations and at worst outright fraud.

This is why Strategic Coin only engages with utility tokens — tokens that provide holders with a clear use case, such as access to a product or service. Utility tokens are distributed through token generation events (TGEs), although many people still refer to them colloquially as ICOs.

Ask the Right Questions

Even after making this paradigm shift, token buyers must still evaluate individual projects to determine which ones to support. Token buyers should ask three questions of each TGE to determine which ones deserve a closer look.

Is There a Product, and Does It Have a Market?

First, identify whether a project is developing a product that will meet an actual need, not just trade on ICO hype to raise millions of dollars from starry-eyed contributors. Favor projects that already have a working beta rather than just an idea and a whitepaper. Remember, the token should be a key feature of the platform — not an afterthought.

Do I Trust These People With My Money or Not?

Next, determine whether the developers have the qualifications and experience to execute the project to completion. Identify whether the team members have a verifiable history of seeing projects through to completion, and show partiality to teams who have worked together successfully in the past.

If I Give These People My Money, What Are They Going to Do With It?

Finally, token buyers should scrutinize how the developers intend to utilize their TGE funds. Do they have a responsible roadmap, and if so, have they taken any steps to be transparent about how they spend their funds? Each project’s needs are unique, but, given the nascent nature of the blockchain landscape, all projects should devote significant resources to legal compliance.

By using these questions to winnow the field, token buyers can ensure that they have time to research the most promising TGEs at a closer level.

[For more information about evaluating TGEs, consult the in-depth token analysis reports developed by Strategic Coin’s research team.]

Avoid TGEs With Red Flags

Obviously, token buyers do not have time to research and evaluate every TGE. Consequently, it is important to be on the lookout for red flags that should cause cautious contributors to eschew a particular project — or at least view it with extreme suspicion. Two of the most blatant warnings are developer opacity and unrealistic goals.

Developer Opacity

One of the most glaring red flags is that the development team remains anonymous or the operators are otherwise-unknown. Although there are valid reasons to desire one’s privacy, fraudsters often use anonymity to help perpetuate their malevolent schemes.

The PlexCoin operators, for instance, concealed their identities to prevent token buyers from discovering that the ICO’s organizer, Dominic Lacroix, had violated securities laws in his native Quebec in the past. To make matters worse, he was actively flaunting a court order against holding a securities offering even as he was conducting the PlexCoin ICO.

Even if the developers had a valid reason to remain anonymous, their opacity would prevent token buyers from scrutinizing their qualifications, which should cause sophisticated contributors to avoid the project altogether.

Unrealistic Goals or Suspicious Claims

Another red flag is that whitepapers or marketing materials set unrealistic goals — or promise questionable returns. Setting unrealistic goals for a project could demonstrate naivety on the part of the developers, or it could be something more sinister. Either way, token buyers should proceed with caution.

Promising token buyers that they will yield enormous profits, however, should set off warning bells. Once again, PlexCoin investors fell prey to this trap. The operators of this ICO led investors to believe that they could realize gains of up to 1,354 percent in just 29 days. Not only should token buyers have found this claim suspicious, but they should have also recognized that it violated federal securities laws since the organizers were clearly marketing the token as an investment but had not registered with the SEC.

Don’t Let Yourself Become a Victim

The advent of the cryptoassets represents an exciting development for the finance industry, and token buyers have a unique opportunity to participate directly in technological innovations that would have been labeled science fiction just a few decades ago. Nevertheless, as SEC Co-Director Steven Peikin stated at a recent public forum, bad actors often attempt to capitalize on this excitement to defraud unwitting individuals.

“As with any kind of newsworthy event, roaches kind of crawl out of the woodwork and try to scam money off of investors,” said Peikin.

This is particularly true in a field as highly-technical as the cryptoasset space, which is why token buyers must take an active role in protecting themselves and their assets. This process requires extensive commitment and constant vigilience, but, armed with the educational resources developed by Strategic Coin, token buyers will be able to navigate the market with confidence.

Strategic Coin is committed to providing you with trustworthy information about launching and participating in the world of cryptocurrency. Whether you are a start-up or existing business that desires to enlist the help of a professional utility token generation event advisor or a token buyer who needs help navigating the blockchain space, Strategic Coin will provide you with the resources you need to take advantage of market opportunities within the crypto marketplace.

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