Each year a rapidly evolving digital economy generates more cryptocurrencies and associated tools. And, in the crypto world the “ICO” – Initial Coin Offering – has been nothing short of a phenomenon. But when these fund raisings arise, how do investors properly evaluate the investment opportunity and can ratings assist?
Now, Ambisafe Inc., a U.S. corporation founded in 2015 with offices in San Francisco and Kiev that provides access to blockchain-based financial instruments, together with Russian-based rating agency ICOrating, is providing what it touts as a “complete guide” to ICO’s to aid investors in unscrambling the wheat from the chaff in such offerings and seize potential opportunities to investing in cryptocurrency and exchanges space.
The project’s stated mission is to ensure “high quality standards” of companies raising funds on the ICOs and help investors to avoid losses in a rapidly developing ICO market. And, in theory, it should help investors make more informed and reasoned decisions about investments in blockchain startups.
It’s perhaps a timely move given for the ICO market that is based on the blockchain industry, and where there is a complete lack of a reliable set of criteria for the evaluation of new platforms. Investors have to collect the information on blockchain projects piece by piece on various sources, companies’ websites and discussion forums, where each participant expresses their subjective viewpoint.
While at the moment blockchain industry is going through the standardization and the development of evaluation and application standards for new opportunities, according to ICOrating, founded in 2016 by internet entrepreneur Dmitry Filatov with offices in St. Petersburg and Barcelona, to date: “There are no sources of systematically assessed and analysed data on blockchain projects.” By way of background, Filatov launched Topface, an international dating service reputedly with over 60 million registered current users.
The agency’s evaluation spans technical features of the platform in question, the business model and market niche, the team and business experience in the blockchain industry and development, strengths and weaknesses of the decentralized infrastructure, and other factors like technical background (e.g. quality of the prototype or source code), and analysis of community feedback.
As such, ICOrating issues independent analytical research and are developing a benchmark for the evaluation of blockchain-based companies planning on an ICO.
By undertaking research and analysis of all aspects behind a particular project and the specific cryptocurrency financial instrument, they objectively evaluate risks and create a complete picture of the investment object and its potential.
The agency, which ascribes ratings on a scale ranging from ‘Stable’ to ‘Negative’ and ‘Risky’, adds: “The emergence of a new business model creates great opportunities for users and investors,” ICOrating states. “But any young market carries significant risks for all the participants due to the lack of quality assessment standards, reliability and transparency of the new projects. This situation causes a lot of fraudulent schemes.”
As for Ambisafe, whose founding team has been pioneering cryptocurrency development since 2010, founders Andrey Zamovskiy (CEO) and Anton Tovstonozhenko previously launched HolyTransaction and made contributions to other cryptocurrency projects including Tether, Expresscoin and Bitfinex amongst others.
What Is An ICO?
The ICO could be considered analogous to an Initial Public Offering (IPO) in the cryptocurrency economy. If an IPO is known as an offering of shares or equities on a stock exchange in the traditional economy, then the ICO is the process of releasing a company’s own tokens and being accommodated or listed on a cryptocurrency exchange.
Due to innovations provided by blockchain technology, the cost of this process using cryptocurrency exchanges is claimed to be “ten times cheaper” than the cost of the traditional IPO on financial exchanges.
Ambisafe explains that this is possible due to absence of complex regulatory rules and procedures, much simpler reporting requirements and use of digital identity-based processes instead of paperwork everywhere in the process.
For example, if the minimum IPO price for a listing on a European stock exchange is around $200,000, the total value of all the ICO process with access to a cryptocurrency exchange such as Poloniex ranges between $10,000 and $20,000. According to Ambisafe could therefore “spend about $40,000” raise up to $10 million (m) of investment capital through an ICO process.
There has certainly been a voracious investor appetite for ICO’s of late. Last year saw a number of successful ICO’s across a range of business use cases. Iconomi, an open fund management platform in the investment and finance space based in Ljubljana, Slovenia, attracted investment of 17,274 bitcoin (BTC) in its ICO held between August 25 and September 29, which is equivalent to c.13m.
Elsewhere, Polish-based venture Golem, a decentralized supercomputer anyone can use to sell the computer’s computing time over the internet and rated ‘Stable+’ by ICOrating, in a matter of 20 minutes gained the necessary investment amount through an ICO to fulfil its plan (820,002 ETH, equivalent to c.$8m) on September 11.
And, FirstBlood, an infrastructure for gamers and decentralized eSports platform based on Smart Contracts, commenced an ICO (September 25) lasting just 8 minutes 48 seconds attracting investment of 465,313 ETH, equivalent to c. $5.5m.
Launch To ICO
There are various steps behind the launch of an ICO including: Stage 1 – Pre-Announcement; Stage 2 – The Offer; Stage 3 – PR Campaign; and, Stage 4 – Start Of Sales In The ICO Framework.
The pre-announcement is where the future project under the ICO, mainly used for crowdfunding projects, is announced within the communities of cryptocurrency investors, such as Bitcoin Talk, Reddit and others. An executive summary – a small presentation – is made to investors where the essence and purpose of the ICO project is explained.
This announcement may lead to many questions being raised about the business model and unperceived risks. Taking into account all incoming comments, the business model receives any necessary adjustments. This first stage the ends with making the final business model of the project and writing the detailed offering.
The Offer is a proposal for conclusion of the transaction, which sets out the essential terms of a contract addressed to a particular person, a limited or unlimited number of persons. It is made on behalf of the company that enters an ICO, and covers all the nuances of the project, specifics on the desired investment amount sought and the project’s deadlines. As a rule the financial instrument is in the form of tokens.
One token can be equal, for example, to $1.00 of a debt, 1 share of the company, 10 shares of the company, the right to vote anywhere else, and so on.
Now, given that there are no established standards on what will be the token in a particular project, so it is specified individually in each offer. After selecting a financial instrument, the offer covers all the rights possessed by the token.
Take the ETH token, which was released during Ethereum’s ICO and extremely speculative in nature, and the DigixDAO (DGD) token in addition to being backed by foreign exchange reserves, also gives the holder the right to put forward proposals for the management of the company to the other shareholders.
As a rule, tokens are provided for a certain period indicated in the offer, after which the company begins to pay its obligations to investors (e.g. pay dividends). Following the signing the offer the start date of the sale of tokens is announced. And, then the issuing company carries out an active PR campaign for the ICO, which is focused not on institutionalized investors (banks, funds, etc.), but on a broad segment of smaller investors.
Sales In An ICO Framework
After the end of this campaign the process of selling and buying tokens begins and on the date the ICO starts, the company provides investors a way to buy the tokens indicated by the offer.
As a rule, there are two ways to release the token through the blockchain, namely: (1) Firstly, a minimum amount of money, specified by the offer, and then release the tokens and divide them among investors in proportion; and, (2) Sell the token on the cryptocurrency exchanges. To this end, it is necessary to release it in advance that allows trading them on one or several exchanges simultaneously.
As the cryptocurrency market is still young and there is no mechanism for its regulation as such there are risks. Regulation of the market is a challenging task since cryptocurrencies are censorship-resistant and therefore regulation-resistant by design. Indeed, regulators around the world today are just starting to understand what blockchain is.
Add to that the virtual economy, carrying out all its transactions via Internet payment and without direct contact of the seller and the buyer, is always going to be fraught with risks.
Ambisafe and ICOrating posit that “the majority of the existing projects up to 2017 may turn out to be fraudulent”, because to invest in the virtual economy is easier, and people put their money almost “not looking at any company with a more or less decent presentation without conducting a quality Due Diligence (DueD).”
Only experienced investors though can usually afford to use DueD services from appropriate specialists who provide a report through an in-depth assessment of the investment risks, a thorough investigation of the company and a comprehensive review of its financial condition and market position.
And, with the cryptocurrency economy and ICO’s, due diligence is often conducted cursorily, which leads to investment in projects that are not backed by real business. This can be evidenced in examples of equity crowdfunding with all kinds of lotteries and casinos. On that note, Icorating’s website currently rates Kibo Lottery, a Singaporean entity founded in 2016 and the first decentralized Blockchain and Ethereum smart contract-based lotto, at ‘Negative’.
The emergence on the scene of rating agencies like ICOrating, who make analysis of all the information about the company, entering the cryptocurrency exchange and publishing the results of their research in the form of an independent rating review, would seem logical. They have a role surely to play in conducting independent DueD on entities in the ICO space.
Ambisafe CEO Zamovskiy says: “From our own experience, we strongly recommend prospective investors that they study the subject of investing in more detail or refer for analysis to professional rating agencies.”
He adds: “Rating agencies will help companies entering ICO organize all the necessary information, which will improve the reliability factor of the project in the eyes of investors.” Zamovskiy noted that having been involved in the issue of cryptocurrencies for some two years now they have seen “disappointing statistics of fraud in this field.”
Protecting Against Fraud
One additional way to protect against potential fraudsters is a cryptographic escrow, carried out with the help of Multi-sig purses and independent escrow agents. This means that the company does not collect money directly but with the assistance of third parties.
The funds are collected on Multi-sig purse that can only be accessed from the depositary agents, which in turn provides additional protection. Thus, the company cannot spend the collected money without the digital signing of the agent who check the fulfilment of the terms.
Only if compliance with stated terms of the offer by the company and its implementation and obligations to investors does the company receive access to certain sums of money from the Multi-sig purse.
Furthermore, the depositary agent monitors execution of the stated conditions, integrity of the issuing company, observance of the terms and, in case of successful completion of the first phase of the plan, releasing further tranches of capital. The money remains frozen if the company fails to fulfil such obligations until such as time it does fulfil them, or is returned to investors.
“Some of the business projects currently engaged in carrying out ICO’s have the capacity to eventually grow to an enormous size and repeatedly return the investments made,” says Zamovskiy.
He says further: “We and our partners see our goal in making the way of investors and projects towards their goals more reliable, understandable and effective – reducing risks, maximizing the potential profits, increasing market transparency and stability.”
The goal of ICOrating’s team is to develop clear assessment standards for blockchain start-ups and assign ratings based on a transparent and standardized scale. It was this approach they posit “turned the Wild West traditional stock market into a civilized platform”. Let’s hope so and that the risks of fraud in ICO’s will be minimized for investors with more unbiased information.