First Bitcoin, Now It Is ICOs

By Gerald Rome, Colorado Securities Commissioner ~

By now most of us have heard about bitcoin. It is digital money, meaning it only exists on someone’s computer. You can’t hold it or put it in your wallet, but you can buy things with bitcoin, and, more importantly, trade it for dollars. We have heard about it because the price of one bitcoin has gone up from a few dollars a couple of years ago, to more than $17,000 last year. Well, the investment world has moved beyond bitcoin to a new thing called Initial Coin Offerings, or ICOs. You probably know what an initial public offering is, an IPO, where a company offers its stock to investors. ICO’s are the same, except rather than offering investors stock in a company, they offer or give investors a digital coin, similar to bitcoin.

Gerald Rome, Colorado Securities Commissioner

Gerald Rome, Securities Commissioner

These are one of the new trendy investments attracting those interested in technology. These investments are touted by celebrities, held out as “get rich quick” offerings, and are a hot topic of discussion from the water cooler at startup companies to the grill at neighborhood bar-b-ques. What’s not talked about as much, however, is that these offerings have considerably fewer investor protections than in traditional securities markets. Investors considering participating in an ICO investment need to be aware of the growing potential for fraud and manipulation these offerings present. Even outside of the large numbers of fraudulent ICOs out there, these investments are very risky and are not suitable for almost any investor, as there is potential to lose a lot of money.

Some people argue that ICOs are not securities. But to me, if you are investing in a start-up company, and you expect to profit because you think the “coin” you purchased with your investment will go up in value, then that surely sounds like a security to me. At our agency, we will be treating these ICOs as securities transactions.

If you or someone you know is interested in investing in ICOs, here are some ways you can help ensure that you stay protected:

• Don’t Invest Money You Can’t Afford to Lose. ICOs are not the same as other investments like traditional stocks and bonds. Investing in ICOs should be seen as entirely speculative.

• Research the ICO on the web, particularly on popular sites such as reddit.com, bitcointalk.org. Research the individuals behind the ICO. Ask questions and be skeptical.

• Focus on the token features. Consider whether the token has any value outside of the ICO. Also consider whether the tokens can be traded on virtual currency exchanges. This could help determine whether you will be able to convert the tokens to cash.

• Watch for scams. Individuals could organize a pump-and-dump scheme to urge investors to buy into the ICO, promote it to elevate the price, and then sell it off in a coordinated sale. The price plummets and those unaware of the scheme are left with devalued tokens.

• Think with your head, not your heart. Scammers often use language intentionally designed to provoke some emotional reaction in their targets. Whatever the appeal, remember that investing is a business decision. Ask yourself, “Is this investment right for me?”
Of course, if you have additional questions, we at the Division of Securities are always happy to help. Give us a call at (303) 894-2320, or visit our website at www.dora.colorado.gov/dos.