The ICO market is full of good and bad, should it be regulated or self-regulated?

The ICO (Initial Coin Offering) industry has exploded recently, as startups can raise funds directly from the public without going through the rigorous review of venture capitalists and banks. Although there are some projects that are legitimate ICOs, this new fundraising method has also attracted many scammers.

ICOs Are Not Cryptocurrency IPOs

ICOs are often compared to initial public offerings (IPOs) of stocks. However, there are big differences between the two. The former uses a technical white paper to attract investors, while the latter requires a comprehensive prospectus and registration with regulators. (In the United States, companies seeking IPOs must register with the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA))

The entire process of the Securities and Exchange Commission (SEC) reviewing the registration may take up to six months before the filing takes effect. During this period, the company applying for an IPO will have its activities restricted and must report its work to the SEC to ensure compliance. It is these arduous IPO processes that eliminate most scammers and incompetent companies.

Some ICOs are outright scams

ICOs do not require filing requirements or professional supervision, so project initiators can write anything in their white papers. They often omit (whether intentionally or otherwise) some very important information for investors, making it difficult for investors to judge the rationality of the project. Some individual investors will conduct their own research, but a large number of investors, due to lack of sufficient professional knowledge, often cannot make wise decisions.

(Tim Lea, CEO of Veredictum.io)

“Often, investors have little understanding of the underlying technical properties of the cryptocurrencies themselves,” Tim Lea, CEO of Veredictum.io, said of ICOs. “Individual investors blindly assume that there will be a consistent, profitable market for these tokens on exchanges.”

Since some investors do not have enough knowledge to make an informed decision, they invest blindly, but some project founders take advantage of this situation. Lea said:

“A lot of cryptocurrency crowdfunding is actually outright scams where these people promise to launch a new cryptocurrency but never deliver and walk away with the money after the crowdfunding is completed. These scams make the entire community more and more cautious, and investors are more and more wary of these new coins that are emerging,” he said, which can lead to ICOs with real good ideas being rejected by the community.

ICOs may face regulation

Currently, there are no applicable laws regulating ICOs. However, this may change. A report released by the Outlier Ventures research institute explains the possibility of the SEC regulating the ICO market.

In the worst-case scenario, “after scammers use token presales to fleece large amounts of money and generate widespread media coverage, tokens are deemed to be securities and regulated accordingly,” the company wrote. In this scenario, the SEC would regulate the tokens as securities, which would end the ICO market as we know it.

However, Outlier Ventures, a research firm, believes that it is more likely that ICOs will continue to operate in a legal gray area. “Ultimately, the industry should improve and produce better white papers and pre-sale documents, as well as better communication. Once standards and expectations are raised, the chances of scammers being successful will be greatly reduced,” the company believes.