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What Has Happened With ICOs?

The ICO market has seen exponential growth over the past 12 months, with issuance increasing from just $200m worldwide in 2016 to $4bn in 2017.  Estimates for 2018 exceed $10bn, should Telegram’s ICO reach expectations.

With that success, however, has come multiple high-profile fraudulent offerings. This includes the now infamous OneCoin, an elaborate multi-year Ponzi scheme which was raided by police just last month, leaving investors facing millions in losses.

Other ICOs, like Confido, which disappeared just hours after raising $370,000, were faked entirely from the outset and have now become part of a growing number of ‘exit-scams’. It’s not just fraud though. More recently, the highly successful ICO of Tezos has been marred in controversy as the founding partners became embroiled in an acrimonious battle for control over funds, leaving the project facing major delays and uncertainty. With lawsuits pending, the future is shaky for Tezos.

As it stands, this promising industry remains ripe for scammers because it is relatively new, supported by record-making gains, and involves complicated terminology for new and inexperienced investors. Regulators around the world are beginning to scrutinize initial coin offerings. Authorities in the United States, Switzerland, Britain and Malaysia have issued investor warnings, drawing attention to scams and the possible lack of legal recourse for ICO investors.

ICOs have so far largely avoided serious scrutiny from the SEC, as blockchain startups are often international and anonymous—which can place them out of oversight. This lack of oversight is another reason for the proliferation of scams. This may be set to change though, as recent reports suggest the SEC is devoting a significant portion‘ of its resources to uncovering and discouraging cryptocurrency scams, and there has been a notable uptick in sting operations in early 2018.

Regulatory oversight aside, most troubled offerings could have been avoided through disciplined independent due diligence efforts. The most common scams rely on investors not doing their research into fake management teams, ‘guaranteed investment returns’, or a complete lack of transparency about their operating model.
To help keep investors safe going forward, we’ve compiled a list of the most notable ICO failures to date along with the due diligence checks that would have saved investors from thousands, if not millions in losses.


AriseBank

Date: January 2018

Funds Raised: $600m (since cancelled)

What happened?

AriseBank was looking to be a potential star player in the decentralized banking space, with celebrity endorsements and a targeted fund raise of $1bn. This would have made it one of the largest ICOs to date.

In late January 2018, the SEC announced that it had halted the AriseBank ICO on the grounds that it falsely advertised that it could offer customers FDIC-insured banking accounts. AriseBank claimed in marketing materials that it had acquired a “100-year-old commercial bank” with an FDIC license, which they claimed would allow Arise to offer accounts insured by the federal government.

The SEC alleged AriseBank “falsely stated that it purchased [a Federal Deposit Insurance Corporation]-insured bank which enabled it to offer customers FDIC-insured accounts.” As a result it obtained a court-order to freeze the assets of AriseBank and halt new fundraising.

As it currently stands, the SEC has successfully frozen the assets of AriseBank under emergency provisions, and a court has appointed a receiver to manage the assets and ensure that they can’t be liquidated.

How to detect it?

Vetting any substantial claim from an ICO whitepaper is vital to ensuring a successful investment. In AriseBank’s case, the claim that it had acquired an FDIC licensed bank was a material part of its investment case and the lack of documentation to prove this claim is an immediate red flag. 


OneCoin

Date: Planned for October 2018

Funds Raised: $350m+

What happened?

Perhaps the most famous ICO scam to date, Mumbai-based OneCoin, a once-lauded blockchain startup, was discovered to be a Ponzi scheme—but not before its founders allegedly funneled at least $350 million through Germany.

Whilst OneCoin loudly promoted its use of blockchain technology, their claims were unraveling long before international law enforcement took notice. OneCoin was created and promoted by known fraudsters under false credentials. Its directors had reportedly been involved in other known scam operations and its resources contained no verifiable evidence for any of its business claims. Documentation uploaded to support claims often conflicted with the claims themselves.

The company used a sophisticated global marketing and promotion effort to position itself as the alternative to Bitcoin, typically praying on unsophisticated investors for additional capital. It was not long before international regulators made a coordinated effort to shut the bsiness down. On July 10th 2017, CEO Ruja Ignatova was charged in India with duping investors as a part of the Indian Investigation. On January 17th and 18th of 2018, Bulgarian police raided OneCoin’s office in Sofia, Bulgaria, at the request of the prosecutor’s office in Bielefeld, Germany.

How to detect it?

Many of the management team and major marketing partners had been involved in previous pyramid schemes or scams in the past. No information regarding its technical specifications could be found online and was nearly impossible to verify. In addition, there were significant inconsistencies in documents uploaded to support claims made by the company. For example the resume of OneCoin’s Founder, Owner and Chief Operating Officer ‘Dr. Ruja Ignatova’, was found to be inconsistent with versions uploaded to affiliated websites for the company. Lastly, the time-pressured nature of the company’s sales seminars and promise of guaranteed returns again served as obvious red flags in this offering.


Confido

Date: November 2017

Funds Raised: $370,000

What happened?

Up until recently, Confido was perhaps one of the better known exit scams, having disappeared with $370,000 of investors’ funds. With the recent slew of much larger fraudulent ICOs, Confido’s is less notable from the perspective of size, but is still a good example of a classic exit scam.

The company pitched itself as a blockchain-based app for making payments and tracking shipments. It sold digital tokens to investors over the Ethereum blockchain in an ICO that ran for three days in November 2017 and raised just over $370,000. The company then abruptly took down its website and social media footprint, leaving only a single medium article remaining that claimed:

“Right now, we are in a tight spot, as we are having legal trouble caused by a contract we signed. It is likely that we will be able to find a solution to rectify the situation. However, we cannot assure you with 100% certainty that we will get through this.” The message was apparently written by Confido’s founder, Joost van Doorn, who’s LinkedIn profile had also vanished without trace.

How to detect it?

The most obvious warning sign for Confido was the lack of any substantial information about its management team. The social fingerprint of each team member was sparce and/or not readily verifiable. Checking the work history of each member would have brought up multiple warning flags early on.


Othor

Date: December 2017                          

Funds Raised: Unknown    

What happened?

Othor launched itself in December 2017 with the following promotional messaging: “People in most countries of the world can’t buy cryptocurrencies using popular local payment methods for goods and services. Othor provide services in social network payments, investment, IPO, stock market, rewards, e-commerce, products, financial services. With the help of Othor, users will be able to quickly and easily convert cryptocurrencies into fiat currency, and vice versa.”

Seemingly innocuous, savvier investors were quick to point out flaws in its offering. The most blatant was the claim that Ethereum founder, Vitalik Buterin, was a member of its core development team. Vitalik was quick to deny this in a tweet.

The ICO also had other hallmarks of a scam, including overzealous marketing videos on YouTube (which have since been removed) and a list of executives who likely never existed—there are no traces of Othor’s lawyer “Domhnall Barden” and CFO “Bill Wolfhard” on Google. Their “Head of Law & Regulation”, Domhnall Bardema, used an image of a Spanish instructor named Michael Tabegna. Their CTO, Nicholas Hamilton, used an image of Spanish actor Martino Rivas, and their CFO, Bill Wolfhard, used an image of a chef in Spain named Quique Dacosta.

The company has since deleted most of its marketing material.

How to detect it?

The savvier members of the Reddit group that outed this deal as fraud used deeper research into the team members to vet the authenticity of this ICO. Given the holes in the background checks of management, it’s likely that further digging into its technology offering would have highlighted some obvious errors as well. That said, the use of fake names and images for team members is enough of a red flag to avoid investment entirely.


LoopX

Date: January 2018

Funds Raised: $4.5m

What happened?

LoopX was another classic exit-scam. Pitched as an investment platform with its own unique algorithm, the company boasted “guaranteed profits every week thanks to the most advanced trading software out there to date”.

According to a cached version of its now-purged website, investors pledged a total of 276 Bitcoin and 2,446 Ethereum into the fraudulent initial coin offering over five separate token sales in January of 2018.

The investment platform then went abruptly and completely dark after raising $4.5 million. Overnight, it pulled its website and deleted its social media presence, including fake Facebook, Twitter, YouTube, and Telegram accounts.

How to detect it?

Some of the early warning signs of fraud were a lack of transparency around its trading algorithm, with promises of transparency after all capital raising was complete. More suspicious though was that LoopX never offered any details about its team members or developers who would have been crucial to developing such IP. Deeper research checks on their social media footprint would have unearthed these obvious inconsistencies. Perhaps the most obvious red flag was the promise of ‘guaranteed profits’, a common theme across many fraudulent ICOs.


BitConnect

Date: December 2016

What happened?

The bitcoin lending platform BitConnect launched successfully in December 2016 and swiftly became one of 2017’s best performing currencies on CoinMarketCap. During its peak, it boasted a market cap of over $2.6 billion and a coin value exceeding the $400 mark.

Despite stellar growth though, the investment platform attracted criticism early on, including from Ethereum’s Vitalik Buterin who recognised its guaranteed 1% return per day (up to 40% a month) as being almost certainly a Ponzi scheme.

Following an investigation in November, the British Registrar of Companies served BitConnect with a strike-off notice, threatening to shut it down and dissolve its operation unless further action is taken.

In January, BitConnect got hit with a cease and desist letter from the Texas Securities Board, ordering the company to close down its operation and cut distribution of BCC. The notice from the TSSB was followed by another cease and desist letter a week later from the North Carolina Securities Division. Both filings stated BitConnect was running a potentially fraudulent operation, implicating the company in a series of violations.

In response the company launched a media assault, charging its brand ambassadors with creating videos and articles to defend the company’s business model, and publishing so much content that Google news was filled with almost entirely company-sponsored media supporting its operations.

By late January though it decided the game was up, announced the closing down of its lending operations and oversaw a 96% fall in its token value within 24 hours.

How to detect it?

One of four major fraud flags to look for when appraising an ICO is any promise of guaranteed high returns. The month rate of return and its implied annual rate of return was so ludicrously high any serious investor could have seen it relied upon extreme growth assumptions to maintain.


DavorCoin

Date: November 2017

What happened?

DavorCoin was an ambitious blockchain company that promised a monthy interest rate for those lending to it of ‘up to 48%’. A staggering rate of return which only made sense based on continued capital flows to it (i.e. a Ponzi Scheme). Whilst the company completed a successful raise and achieved significant price appreciated in the following months, it wasn’t long before regulators took a closer look at the promised investment returns.

On February 2nd though the Texas State Securities Board (TSSB) filed a cease-and-desist to the company alleging it had been issuing unregistered securities with fraudulent and misleading information to lure investors. According to the agency, DavorCoin launched its lending program promising investors a significant return on investment, which falls under the agency’s definition of unregistered securities.

The TSSB also alleged that the project is an investment fraud, because DavorCoin had intentionally hidden material information of its business – including its principles and business location, as well as how it plans to realize investment promises for investors.

As a result the company announced shortly thereafter it was returning all tokens back to investors (now since fallen in price by some 90%+) and shutting down its lending operations. No other official announcements from the business have followed since.

How to detect it?

Similar to BitConnect, one of four major fraud flags to look for when appraising an ICO is any promise of guaranteed high returns. The month rate of return and its implied annual rate of return was so ludicrously high any serious investor could have seen it relied upon extreme growth assumptions to maintain.


Final Thoughts

Whether regulation comes or not (and this may not be desirable for crypto enthusiasts), its important that investors are armed with as much information as possible when sifting through the ever expanding ICO landscape in 2018.

In the absence of any issuer-side improvement in offering standards, a robust and exacting due diligence process is key to investing successfully. An investor should carry out a full verification of the company’s claims to validate all the key investment checks and criteria, from technical assessment of the block-chain technology involved in the project to background checks on the management team. From a full audit of the use of proceeds to verification of the rights and obligations assigned under the token itself.

With a complete perspective, you can then make an informed decision on valuation and demand with greater certainty over the nature of the business and its ICO.

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