The unfortunate reality is that the crypto space is inundated with shady people, hype, empty promises, and dishonest marketing. This Firm deals regularly with due diligence reviews of various coin offerings and drafting of opinions regarding crypto projects, to include their viability as an ongoing business concern as well as legal compliance. Most investors are simply not sophisticated enough to be able to fully review a given project and judge its merits without professional assistance. A bad decision with respect to an investment may cost far more than the professional fees expended in the effort to fully review a given offering, and it is strongly suggested that investors not proceed into any investment without substantial experience doing so or without the counsel of those who possess such experience.
The first item to review with respect to a given crypto project is legal compliance. After a review of the whitepaper/business plan which provides the details of the venture, the offering must comply with US securities laws if the offering is being conducted in the US, or it may be halted before, during, or after the offering is conducted. Ideally, the way to ensure compliance is to have a legal opinion as the token status under the Howey test posted on the offering site or readily available to investors, and if the token is a utility token (and the platform is completed or close to it) then there should not be any issues under US law.
Otherwise, if a token is deemed to be a security then it needs to be registered (no token offerings have yet been registered), or sold under an exemption from registration, usually under Regulation D. In such a case only verified “accredited investors” may participate in the offering. Even without a legal opinion, before participating in an offering it is often a good idea to have an independent attorney review the token status to ensure that your investment will be in compliance and not under threat of an SEC intervention.
The project team is an essential ingredient to the success of a crypto venture and their experience and backgrounds must be researched and validated. You want to ensure these are real people, and cross-reference their descriptions on the offering site/prospectus/marketing materials with their descriptions on other 3rd party platforms. They should mention their current involvement in the project somewhere on their pubic profiles and their experience should match that which is stated on the offering site or in marketing materials. If the team and/or their backgrounds are not being fully disclosed by the token issuer that is a major red flag.
The next items to review would be the Terms of Sale, Terms of Use, and Privacy Policy (if available); you want to pay particular attention to the rights you are granting the issuer by purchasing their tokens, how your information will be validated (KYC check), and whom it will be shared with. You will want to understand the dates of the offering and any pre-sale discounts for early purchasers, the exchange rates, and carefully review any forward-looking statements as well as risks involved in the venture.
If a project does not offer these documents but only provides a colorful marketing prospectus with some of the above information that would also be a significant red flag, indicating a lack of legal counsel attached to the project and lack of intent to enter into a binding agreement with token purchasers.
Of course, other aspects such as project viability, market need, competition, how the funds will be utilized after the offering, the stage the venture is in at the time, listing of the token on any exchanges, and long-term plans are all important aspect to consider prior to an investment. You should be aware that the vast majority of initial coin offerings will either fail to meet their funding goals, don’t have a viable business plan to obtain any significant platform implementation, or are outrights scams.
As in any industry, there are bad actors who are looking to separate you from your fiat or cryptocurrency, and the general lack of regulation and grey legal status of this industry make the likelihood of being taken advantage of that much more likely. Please don’t hesitate to contact this Firm before investing into any kind of cryptocurrency venture.
