How to Avoid Scams When Investing in ICO’s

There were 235 Initial Coin Offerings in 2017, raising a total of $3.7 billion. In the still largely unregulated world of ICOs, and with that much relatively “easy money” up for grabs, it’s not surprising that some of the 235 turned out to be scams.

Notable in its brazenness was a project called DeClouds, whose founder went so far as to photoshop a picture of himself seemingly giving a talk at UBS Bank after claiming to have a partnership with said bank.

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Several projects were accused of running Ponzi Schemes. PlexCoin, which promised investors a more than 13x return within a month, had the dubious distinction of being the first target of the newly formed Cyber Unit of the US Securities and Exchange Commission (SEC) in December.

While the new funding mechanism enabled by the “Token Generating Event” has certainly attracted some bad apples, the vast majority of ICOs in 2017 were legitimate projects seeking to raise funds to kick-start valuable businesses. People who invested money in the best ICOs were handsomely rewarded, in some cases with much higher returns than even traditional first round venture capitalists have ever been able to achieve.

So moving forward into 2018, here are some tips to help not just avoid the scams, but also to choose a good overall ICO investment:

Watch Out for Buzzword Overload and Put in the Time to Learn the Vernacular

With so much euphoria for anything having to do with “blockchain,” scammers are simply throwing around buzzwords like “token economics” and “smart contract architecture.”

But with so many new concepts associated with this emerging technology, the only way to really know if the buzzwords make sense or not, is to put in the time and do the research. A serious investor will read whitepapers and Google everything they don’t understand.

Beware of Unrealistic Goals

If a project claims to be able to fix a huge problem practically overnight, consider that a red flag. Additionally, no serious team will ever make a price prediction about their token or claim it can bring world peace. The best teams clearly and soberly present their project, leaving it up to the investors to decide how valuable it is.

Clear Roadmap

Check the project’s roadmap. Is it realistic? What needs to be done in order to achieve the goals on the roadmap?

Consider the Structure of the Token Sale

Many token offerings give significant bonuses to early investors to kick-start investment. While this is often warranted due to the fact that earlier investors are considered to be taking on higher risk, if the bonus is too large, the project risks becoming a Ponzi scheme. If early investors receive huge bonuses, as soon as the tokens hit the market, they can simple dump their tokens at a profit and move on to the next project.

So in general, the lower the bonus given in the token “pre-sale,” the better for people who buy in at the “public sale.”

Make Sure Funds are Held in Escrow

When you buy into an ICO, you should check that there’s a clause in the fine print stipulating that any funds raised are first held in escrow. The best projects lock up funds meant for development into escrow accounts with strict stipulations on how and when those funds can be released. This is often tied to reaching (or not) specific targets laid out in the roadmap.

Is There a Working Product? If Yes, Try It!

One way to get a better idea of what a project is capable of, is to actually test out their working product. Many projects already have these; some are in beta stage, while some have been working outside of the blockchain environment for years and are in the process of being adapted to blockchain. Putting in the time to try them out will give you a much better idea of how far along the project is and, judging by things like the design and functionality of the product, how professional the developers are.

Check the Code

Many, if not most, blockchain projects are open-source. This means you can go to their github and actually look at the code. You don’t have to be an expert, or even really understand anything about coding at all. Just have a look at how much activity there has been recently. Is it an active community? How many people have been contributing?


The developer community lives on forums like reddit and bitcointalk. Many projects will open a channel on these platforms, giving anyone interested a chance to “Ask Me Anything.” Checking these forums is always a good way to gauge not only the legitimacy of the project, but also the level of community involvement. Additionally, many projects open a public Telegram channel (usually linked to from their website) where you can again ask questions to team members and see what other people are saying about the project.

Team and Advisors

This is a major consideration. Take the time to dig into the team member’s backgrounds. Check their Linkedin profiles, see how active they have been in the blockchain space and what other projects they have worked on.  Are there any superstar team members?

Most new blockchain projects will also have a list of advisors. These people can be instrumental in the success or failure of a project, especially in its early stages. Some useful advisors that a project should have are:

ICO Advisor

This is someone who has already gone through the ICO process and can use their recently gained connections to help the project succeed at things like getting the token listed on top exchanges.

Industry Insiders

If the project is a decentralized casino that runs on the blockchain, having top players in the online casino industry as advisors is a huge plus.

Legal Compliance

Many blockchain projects open up a mountain of legal questions, so it’s crucial have a good legal team.


Ultimately there’s no substitute for putting in the time to do your due diligence before investing. That being said, there is a growing list of third-party resources that may advise you along the way.

Check ICO Ratings Sites

The following website seek to advise on the quality of upcoming ICOs:




Smith and Crown

While these sites certainly contain valuable information, it can be hard to determine how independent the information presented is. It’s entirely possible for a project to pay such a site to be featured as a good investment opportunity.

The Future: Crowd-sourcing Decentralized Wisdom

In an attempt to solve this problem, platforms like Wings are being developed. In this blockchain platform, projects are scrutinized by a decentralized community of WINGS token holders. The goal is t crowd-source decentralized wisdom to give investors an unbiased prediction of how successful a project can be without having to research it themselves and without having to trust a single centralized entity.

Some Additional Useful Questions to Ask Yourself

This list of questions was published by the SEC in December in a long-awaited public statement about the legality of ICOs:

  • Who exactly am I contracting with?
  • Who is issuing and sponsoring the product, what are their backgrounds, and have they provided a full and complete description of the product? Do they have a clear written business plan that I understand?
  • Who is promoting or marketing the product, what are their backgrounds, and are they licensed to sell the product? Have they been paid to promote the product?
  • Where is the enterprise located?
  • Where is my money going and what will be it be used for? Is my money going to be used to “cash out” others?
  • What specific rights come with my investment?
  • Are there financial statements? If so, are they audited, and by whom?
  • Is there trading data? If so, is there some way to verify it?
  • How, when, and at what cost can I sell my investment? For example, do I have a right to give the token or coin back to the company or to receive a refund? Can I resell the coin or token, and if so, are there any limitations on my ability to resell?
  • If a digital wallet is involved, what happens if I lose the key? Will I still have access to my investment?
  • If a blockchain is used, is the blockchain open and public? Has the code been published, and has there been an independent cybersecurity audit?
  • Has the offering been structured to comply with the securities laws and, if not, what implications will that have for the stability of the enterprise and the value of my investment?
  • What legal protections may or may not be available in the event of fraud, a hack, malware, or a downturn in business prospects? Who will be responsible for refunding my investment if something goes wrong?
  • If I do have legal rights, can I effectively enforce them and will there be adequate funds to compensate me if my rights are violated?