How to detect an ICO scam

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In late January, a blockchain startup called Prodeum, which promised to bring transparency to fruits and vegetable provenance, disappeared with the entire sum it had raised during its Initial Coin Offering (ICO) (allegedly no more than the price of a couple of lattes at Starbucks).

Prodeum is the latest of several ICO and cryptocurrency scams to happen in the past year. Last November, Confido, another blockchain project, made off with $374,000 worth of investor money. In the same month, BitPetite, a bitcoin investment platform, suddenly went dark and left investors out in the cold.

ICOs, also referred to as token sales, have helped fund and propel many a promising blockchain project into development and adoption. But the same characteristics that have turned ICOs an efficient fundraising machine for legitimate projects have also made them attractive to fraudsters and scammers.

ICOs are still highly unregulated, which means virtually anyone can launch one by putting together a flashy website and whitepaper. And the fact that they run on cryptocurrencies makes it relatively easy to hide traces and cash out without being caught.

This means that as an investor, you’re left on your own to avoid traps and wasting your money on scams and doomed-to-fail projects. Here’s how you can vet blockchain projects to make sure they’re legit and worth considering for investment.

Related: What is blockchain?

The team


The most important thing about any project is the people who will be developing it. The startup’s website should have a section that introduces the team. Make sure they are real people with real profiles.

Check their profiles on LinkedIn, but don’t stop there. Also make sure their backgrounds are real. If they claim to have worked with a company or organization in the past, you should be able to confirm it on the company’s website or elsewhere in the web. Also, be careful that some scammers add the names of people on their team without their consent. For instance, one of the alleged founders of Prodeum didn’t even know his name was in the whitepaper until the media contacted him about the scam.

People who work for legit startups have no fear to make public appearances. They should attend conferences, setup webinars and discussions with enthusiasts. If none of the team’s members have made a public appearance on the company’s behalf, you should consider it as a red flag.

The team must also show expertise in the subject matter they’re building and not only software engineering. For instance, if they’re working on a cryptofund platform, they should have a background in finance and fintech.

The whitepaper

paper documents

A project’s whitepaper must clearly state the goal it wants to achieve. This means it should describe the market for the product, the problem it aims to solve and what differentiates it from its competitors. If it is building a decentralized version of a popular service, it must have a viable reason for doing so.

If you’re not too technical, reading the executive summary, plus the first few chapters should give you a clear view of the problem the project is supposed to solve. You can then skim over the technical chapters and skip to the part where the project’s schedule is presented. The whitepaper must also have a timeline of how the team plans to develop the product, what are the stages, and how it plans to roll out the different iterations of its platform.

A whitepaper that is hastily written, contains typos and grammatical errors, or is hard to understand or confusing in structure, is a red flag.

Related: Read more about blockchain’s applications in various domains


If a startup has a minimum viable product (MVP) before the ICO is a plus. But if you plan to invest, make sure you can check the MVP and it’s not more than a web portal with no functionality. Good blockchain projects usually have a testnet where people can catch a glimpse of what they’re building.

If it doesn’t have an MVP, it should have a plan to release one, preferably between the pre-token sale and the full ICO, or shortly after the public token sale. MVPs are important because they validate that a real team has been working on the product and they’ve put some real engineering brain and man hours behind the project. Post-ICO MVPs is a negative score. No plan for MVP is a big red flag.

Soft and hard caps

No team can build a product without enough funds. The company should state a soft cap for its ICO, the minimum amount of money it needs to build the first iteration of its platform. If the soft cap isn’t reached within the ICO timeframe, investors should be refunded.

Too much money is just as dangerous as too little. The project must also have a hard cap, the maximum amount of funds it will raise in its ICO. If the hard cap is reached before the ICO expires, it should automatically stop.

An ICO with no soft and hard cap is a red flag and a dangerous investment.

The balance between the pre-ICO and ICO

balanced rocks

Most legit blockchain startups launch a pre-ICO before their public ICO, in which they provide large investors with the opportunity to purchase their tokens at discount prices. A pre-ICO is a positive sign that the company has been vetted by some real investors. A project that doesn’t plan to launch a pre-ICO is a red flag, because it means that no real investor has investigated and approved the project.

However, having a pre-ICO alone is not enough. Companies must declare the names of at least a few of their investors. Startups that already have an infusion of cash to burn can launch a pre-ICO and buy their own tokens at discount prices to make their projects look legitimate and make bigger gains when tokens return to normal prices post-ICO.

Another consideration is that while a pre-ICO is a sign of legitimacy, it shouldn’t account for too much of the platform’s token reserves. The point of blockchain and distributed ledgers was, after all, to create decentralized economies where everyone shared in the costs and revenues. When the pre-ICO absorbs too much of the tokens, it will result in the centralization of control in the few who have made early investments. It’s not exactly a scam red flag, but it isn’t the right way to run a blockchain platform either.

Team member token share and liquidity

The website and the whitepaper of the company should state how the tokens will be distributed, usually in the shape of a pie chart. Of special importance is how much of the tokens go to team members. It shouldn’t be too much or too little.

If team members have too little of  the tokens, they won’t have clear incentives to help increase their value. When they have too much, they’ll have too big a share in the revenue and control of the platform. According to blockchain expert Nick Tomaino, team members shouldn’t own less than 10% or more than 50% of the tokens.

Also of importance is team member liquidity. If team members can quickly cash out all their tokens after they receive them, they’ll be able to run away with their easy-made cash right after the ICO. The longer they’re obliged to keep them, the more they’re encouraged to help develop the platform and see to its prosperity. According to Tomaino, the founding team shouldn’t get liquidity in the first three years of the project.


Media coverage

Do a little research on what experts and tech publications are saying about the project. If the team has a serious story, it should have managed to get some serious media coverage on the project. More important are independent experts that examine blockchain projects and ideas without having interests or ties to the team and its token. Tomaino’s The Control is a good place to look. Top-tier tech and blockchain websites such as CoinDesk, TechCrunch and The Next Web are also good sources, but this doesn’t mean you shouldn’t do your own reading of the whitepaper. After all, if you’re going to put money in the project, you should know what it’s doing.

Putting it all together

This is far from a comprehensive guide on ICOs. But sticking to these guidelines should help you navigate your way through the dozens of blockchain projects that are declaring their existence every month. I’m not much of an investor myself, but I observe and write a lot about the developments in the space. if I’m going to write about a startup I usually go through the same process. If my assessment of a project results in three or more red flags, I don’t take it seriously.

The team requires extra scrutiny and is a different story altogether. Don’t go giving your money to a bunch of ghosts.

There are plenty of legitimate projects out there that are worth investing in. But there are plenty shady ones too. Try to find and invest in the former and steer clear of the latter.



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