You have heard good things about an Initial Coin Offering (ICO). What are the right questions to ask?
In late 2017, most people who had any interest in the Crypto World were focusing on the extraordinary surge in the price of Bitcoin and the rise in the trading volumes of crypto-exchanges globally.
Meanwhile, the Fintech Association of Hong Kong (FAHK) was looking at the Crypto World from the point of view of Crypto-Venture Capital (VC) entrepreneurs. Nearly six months later, the FAHK’s paper on ‘Best Practices for Token Sales’ remains one of the clearest discussions of the issues that really matter for deal makers who are looking to undertake ICOs.
In its paper, the FAHK identifies questions that are as relevant to ICO investors as much as to Crypto-VC entrepreneurs.
The project. Most crypto-coins (and, indeed, many securities that are listed on a conventional exchange) exist to solve problems. What is the problem that the new crypto-coin looks to solve? Will people see it as a viable solution to the problem? Is there already an effective solution that is being widely used?
The crypto-coin. Crypto-coins can provide solutions to problems. However, solutions to problems do not necessarily come from crypto-coins. How will the new crypto-coin really contribute to the solution of the problem in the way that another approach (e.g. an initial public offering or IPO from an existing company) would not? Are the economics of the IPO and the way in which the crypto-coin is to work really viable? In one sentence, who are the people who will buy the crypto-coin and why?
The entrepreneur. Virtually no successful enterprises depend on just one person. They depend on a team. Does the team behind the ICO have the expertise that is needed? If not, are they willing and able to buy in the expertise that they need? Taking into account the cost of buying in expertise, how will the IPO be financed?
The strategy. It is one thing talking about the issues that matter in an ICO. It is another to actually execute the deal. What are the details behind the ICO? What is the exchange on which the new crypto-coin will be traded? How will conversion between fiat currencies and the crypto-coin be handled? Could the vision behind the deal be better executed with private investments or private loans?
The Whitepaper. The Whitepaper is the document that explains an ICO in full. What matters is clarity. In the Crypto World as in the world of conventional investment, a potential investor’s understanding of the deal is key. The more that he/she really understands, the less likely it is that he/she will be disappointed. Does the whitepaper explain the essence of the project in no more than 200 words? Can the rationale for the crypto-coin be summarised in just one sentence? Does the whitepaper show that the team behind the ICO really have credibility? Even if it only does so with a graphic timeline and a series of bullet points, does the Whitepaper really explain how the deal is to be executed?
The risks. Perhaps most importantly, the Whitepaper should make it clear what are the risks and how the sponsors of the ICOs are working to mitigate those risks. Even if there is the real possibility that an investor in a particular deal will lose all the money that he/she is committing, it does not mean that the deal is a bad one. Have independent and professional advisers been involved with the preparation of the Whitepaper?