Source: Coinstaker, originally published on .
Detailed Explanation of ICO Evaluations
ICO Evaluation is something that is often times simply overlooked. Companies and individuals are increasingly considering initial coin offerings (ICOs) as a way to raise capital or participate in investment opportunities. While these digital assets and the technology behind them may present a new and efficient means for carrying out financial transactions, they also bring increased risk of fraud and manipulation because the markets for these assets are less regulated than traditional capital markets.
When looking at an ICO, determining whether or not to invest is a two-part process. The first part is to determine whether or not the ICO is a Legitimate opportunity or a scam. Then, if you determine that the ICO is legit, and not a scam, the real work begins. In this in-depth article, we will cover some basic information about ICOs that is important for everyone to know. Then we will take you on a step by step journey on how to properly evaluate an ICO.
Understanding Some Things Before Investing
Before you can begin evaluating an ICO, there are some important things you need to know and understand. Having this information and fully understanding it should be your first goal. If you are unsure about any of this information, then you should stop and make sure that you are able to learn it all, in full, before you embark on a journey of investing in ICOs. Any investment opportunity has risks involved and you should never, under any circumstances, invest more money than you can afford to lose.
All ICOs will have something called a Whitepaper. This is the detailed explanation of what the ICO is all about. Almost like a business plan, it will lay out the purpose of the ICO, what it offers, the advantages of the product and other pertinent information. The purpose of the whitepaper is to provide you, the potential investor, with information you need to determine whether or not it is a sound investment opportunity.
Another term you will see in the ICO realm is roadmap. A road map is a timeline of things that the ICO will be accomplishing. More of a set of goals than anything else, a roadmap will show the timeframe in which operations and other activities that relate to the ICO will take place.
United States ICO Considerations
If you live in the United States of America, there are some additional considerations that you need to be aware of. Most ICOs, whether or not they acknowledge it, are offering what the SEC considers as a security product. While this section applies to regulations for American Citizens only, it is good information to consider, no matter where you live.
5 things to be aware of about ICOs
ICOs can be security offerings
ICOs, based on specific facts, may be securities offerings, and fall under the SEC’s jurisdiction of enforcing federal securities laws.
They may need to be registered with the SEC
ICOs that are securities most likely need to be registered with the SEC, or would have to qualify for an exemption to registration.
Tokens sold in ICOs can be called many different things
ICOs, or more specifically tokens, can be called a variety of names, but merely calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security.
ICOs may pose substantial risks
While some ICOs may be attempts at honest investment opportunities, many may be frauds, separating you from your hard-earned money with promises of guaranteed returns and future fortunes. They may also present substantial risks for loss or manipulation, including through hacking, with little recourse for victims after-the-fact.
Ask Questions before investing
If you choose to invest in these products, please ask questions and demand clear answers.
Things to know Before Investing:
Tokens and their products can be sold and traded internationally.
Recognize that these products are often sold on markets that span national borders and that significant trading may occur on systems and platforms outside the United States. Your invested funds may quickly travel overseas without your knowledge. Although the SEC actively enforces securities laws, risks can be amplified, including the risk that market regulators may not be able to effectively pursue bad actors or recover funds.
Research the company and people offering the ICO.
Understand the opportunity that is being presented, and do your homework on the individual who is doing the presenting. Is the offering legal and is the person offering this product licensed to do so? Make sure you visit investor.gov for more resources before you invest.
If it sounds too good to be true, be cautious.
As with any other type of potential investment, if a promoter guarantees returns, if an opportunity sounds too good to be true, or if you are pressured to act quickly, please exercise extreme caution and be aware of the risk that your investment may be lost.
Understand how the product is traded.
Many platforms for trading digital assets refer to themselves as “exchanges,” which can give the false impression to investors that they are regulated or meet the regulatory standards of a national securities exchange.
Ensuring that the product is properly licensed, follows all laws and regulations of the nation which holds jurisdiction over such matters is vital to ensure that you will not be throwing your money away in the end.
Now that you are armed with some critical information and have a better understanding of those key things we discussed above, we can start looking at ICOs and how to evaluate them. This is done in two parts, as we said above. Before wasting any time with the really in-depth research that need to be done, we need to make sure that an ICO is not a scam.
ICO Evaluation Part 1: Is it Legit?
Determining if an ICO is a scam is a relatively quick and simple process. This is because scam ICOs rarely put any effort into their offering, and even those that look good on the surface are easy to spot, once you know what to look for.
By looking at these 5 things, you can easily and quickly determine of an ICO is legit or a scam:
- Lack of named team leads or developers.
- Poor website or whitepaper.
- Lack of a clearly laid out roadmap.
- Uncapped Fundraising goals.
- Sense of Urgency.
Those 5 simple things will help you determine the legitimacy of an ICO offering. Let’s take a look at each one briefly.
Lack of named team leads or developers
Most strong and legitimate ICO projects will include the names of the team leads and developers who have worked on the project. The purpose of doing this is to help create a sense of trust and ownership. It helps to create accountability. Generally, when people set out to create an ICO scam, they do not want to get caught or be held accountable. So, if an ICO does not have named team leads or developers associated with the project, then you should be very suspicious.
Poor website or whitepaper
Usually, when a legitimate ICO is being launched, the company behind it will take the time to create very strong websites and whitepapers that explain, in full detail, the value of the project and all of the reasons why people should invest in it.
If an ICO is a scam, there will, of course, be no good reason why people should invest in it. This means that the people behind it will often skip the step of creating a strong website or whitepaper to support the ICO.
Lack of a clearly laid out roadmap
For most companies who create ICO’s, the ICO is just the first step on a series of other steps that are designed to propel the company forward into the future. So, if there is no clear roadmap associated with the ICO, then it is a major warning sign. A lack of a plan for the future is a very good indicator that the people behind the ICO are probably not planning on it being around for very long, because they are planning to pump and dump it.
Uncapped Fundraising goals
ICO’s are generally created as an effort to generate a certain amount of capital that can be used to help a company fund a specific project or projects with growth as the end goal. Most legitimate ICO’s will state the amount of funding that the company aims to get with the ICO. For example, a company may be seeking $10 million from the ICO, $20 million, $30 million.
If the company or organization behind the ICO has not stated a specific amount of money that it is seeking to gain, then it could be an indication that the goal of the ICO is not actually to fund the company’s growth, but rather to scam investors. So, this is also something that you should watch out for while you are looking for ICOs to invest in.
Sense of urgency
If an ICO suddenly starts putting out a lot of hype about time limits and a need for urgency, then it is definitely something to watch out for. Many ICO scams rely on the so-called “FOMO,” or fear of missing out. So, the people behind these scams attempt to generate a large amount of FOMO in a very short amount of time with aggressive urgency campaigns. Then, once the ICO launches, they simply wait for FOMO to push the price up, and then sell. So, watch out for urgency campaigns and ICO’s who are trying to capitalize on FOMO.
ICO Scam Determination
If after looking at the ICO for the above characteristics and you find any, you should just step back and walk away from the deal. ICOs that are legit will never meet any of the above characteristics. And, in the rare case that they’d meet these and are legit, then you still want to run. Any legit ICO that has the above traits is not a safe investment at all.
Once you have determined that the ICO that you’re interested in investing in is legit, then it is time to see if it is a sound investment.
ICO Evaluation Part 2: Is it a Good Investment?
Every investment poses some risk. Some investments pose greater risk than others. Determining how much risk you will be exposed to is a key element in evaluating an ICO. The amount of risk that you will be taking is solely up to you and will differ for everyone based on their own comfort levels. The one thing that everyone should consider is never to invest more than you are willing to lose. Sometimes, even the most well laid-out plans just do not work.
First, and foremost, if you are considering investing in a particular ICO, you should have an answer to all of the following questions, without having to look it up. There are a lot of questions, most only needing a ‘Yes’ or ‘No’ answer. The answer is not required to be yes or no for any answer. The purpose of these questions is just to ensure that you fully understand the ICO. It is not important to know all of these answers in great detail. As long as none of the questions leave you in total bewilderment, you can safely say that you have a good idea about the ICO. Once you can answer yes to all of these questions, you will be ready to really get down and into researching the opportunity and whether or not it is a fit for your investment tastes.
Preliminary Questions for Considering an ICO Investment Opportunity
Who exactly am I contracting with?
Who is issuing and sponsoring the product, what are their backgrounds, and have they provided a full and complete description of the product? Do they have a clear written business plan that I understand?
Who is promoting or marketing the product, what are their backgrounds, and are they licensed to sell the product? Have they been paid to promote the product?
Where is the project located?
Where is my money going and what will it be used for? Is my money going to be used to “cash out” others?
What specific rights come with my investment?
Are there financial statements? If so, are they audited, and by whom?
Is there trading data? If so, is there some way to verify it?
How, when, and at what cost can I sell my investment? For example, do I have a right to give the token or coin back to the company or to receive a refund? Can I resell the coin or token, and if so, are there any limitations on my ability to resell?
If a digital wallet is involved, what happens if I lose the key? Will I still have access to my investment?
If a blockchain is used, is the blockchain open and public? Has the code been published, and has there been an independent cybersecurity audit?
What legal protections may or may not be available in the event of fraud, a hack, malware, or a downturn in business prospects? Who will be responsible for refunding my investment if something goes wrong?
If I do have legal rights, can I effectively enforce them and will there be adequate funds to compensate me if my rights are violated?
That may seem like a lot of questions to ask for a simple preliminary assessment of an ICO. However, you will be risking your money here, so you can never have too much info to help you reduce the amount of risk that you are exposed to.
ICO Evaluation Checklist and Scorecard
Now that you know for sure that the ICO you are interested in investing in is not a Scam and you have a good idea of what the ICO is about, it is time to evaluate the ICO in detail. These steps will help you to determine if the ICO is a good fit for your investing needs. We have broken down the ICO evaluation process into 8 categories, each with their own sub points. Then we have provided a description of what each sup-point means to help you grade the ICO for that sub-point. More instructions on the actual grading will be provided after we cover the categories and sub points in greater detail.
ICO Evaluation Categories and Sub-Points
Each category and sub-point of this ICO evaluation method are also seen on the ICO evaluation scorecard, which is available at the end of the article. The scoresheet also gives you answers for each of the questions posed by the sub-points. There are 5 possible answers. The goal is to ask yourself these questions, then, thinking about what you know in regard to the ICO, choose the best answer. Once you have chosen that answer, check the column that answer is found in and the rating that it is under. This is the rating you then assign to the ICO evaluation subpoint. It may sound a little confusing, but it is quite simple. We will explain the steps and then by using an example:
ICO Evaluation Scorecard Example
Each subpoint will have a question associated with it, as seen below. Once you are ready to begin your ICO evaluation, follow these simple steps:
- Read the question to yourself.
- Answer the question yourself.
- Match your answer to ours, which appear underneath the colored/numbered bar. Don’t worry if your answer and ours do not match exactly, find the answer we give that comes closest to your answer.
- The number above each answer is the score that you will give to that sub-point.
- Write the score down. Once you have finished a category, add all of the scores up and then divide them by the number of subpoints to get the average score for that ICO evaluation category.
- Once you have completed all of the categories and subpoints on the ICO evaluation scorecard, add up all of the category scores and then divide them by 8 to get the total score for your ICO evaluation.
- The total can be as high as 5, so consider the ICO evaluation score that you give to be out of a possible 5 stars.
Once you have the rating, you can make the determination if the ICO evaluation score is sufficient enough for you to risk your money by investing in the ICO.
ICO Evaluation Scorecard Example
The example shows the category name, in green and the very first question, or subpoint, on the scorecard. Beneath that, there are 5 colored bars, each with a number. These numbers are the possible scores that the question can receive. Ask yourself the question and then choose the answer, below the colored bars, that best matches your answer.
Category: Product or Service
ICO Evaluation 1.1 – Product Development Stage
Is the product ready for use? Is there a working prototype or MVP? How long until it is operational?
|Product Development Stage||Is the product ready for use? Is there a working prototype or MVP? How long until it is operational?|
|Just an idea.||Described only, no product yet.||Prototype / MVP||Beta, Initial Rollout.||Full working product.|
In this example, the ICO evaluation is being done on an ICO which has a product that is available for BETA testing, so we choose the light green colored bar, with a ‘4’. So, the score for this subpoint is ‘4’.
We then would continue on with the ICO evaluation by going to the next question/subpoint, answering and scoring in the same manner. Once we reach the end of the Product or Service category, we would total all the scores for that category and get the average score. The we simply move to the next category, subpoints and follow the procedure all over again. There are 8 categories in all, each has a varying number of subpoints.
ICO Evaluation Example 2: Category Scoring
Every ICO Evaluation should begin with looking at the product or service that the ICO will be providing. For these purposes, a service is also a product. The sub-points will cover the important aspects and things to look for in a product or service. This section aims to help to grade the ICO’s product on many factors. It is where we will start the ICO evaluation process. For the Example, we will ask each question and find the best answer from the choices given, then record the score accordingly. (On the Scorecard, you will be able to enter the scores and then it will automatically calculate everything for you.)
Category: Product or Service
ICO Evaluation– Product Development Stage Is the product ready for use? Is there a working prototype or MVP? How long until it is operational? SCORE: 4
|Just an idea.||Described only, no product yet.||Prototype / MVP||Beta, Initial Rollout.||Full working product.|
ICO Evaluation– Advantages Over Competitors Does this solution have a distinct advantage? SCORE: 3
|No||Nothing Special||Average||Better than most alternatives||Yes, very much so|
ICO Evaluation– Community Reach Is it mass market or specific niche? SCORE: 1
ICO Evaluation– Uniqueness Are there many other similar solutions or is this one of just a few, or even one of a kind? SCORE: 2
ICO Evaluation– Patent Ability & Copyrights Is there (patentable) innovation and intellectual property? SCORE: 2
As you can see in the above example, we gave the scores of, ‘4’, ‘3’, ‘1’, ‘2’ and ‘2’. So, now we add those scores together (4+3+1+2+2=12), for a total of ‘12’. There were 5 subpoints. So, we take the score of 12 and divide it by 5. (12/5= 2.4). So, the category gets a score of 2.4 out of 5. In school, this is a solid ‘C’ Grade.
Once you have completed the other seven categories, and all of their subpoints, those 7 category scores are added together, then divided by 8 to get your rating. Keeping it in the school sense, a final rating of 4.0-5.0 is an ‘A’; 3.0-3.9 is a ‘B’; 2.0-2.9 is a ‘C’; 1.0-1.9 is a ‘D’; 0.0-0.9 is an ‘F’.
ICO Evaluation Honest Scoring
It is important that you are totally honest with yourself when grading these subpoints. Your ICO evaluation will only be accurate for yourself, since it is your perception that will be the grading factor on some of these questions. Some of the answers will be simple facts that help determine the answer, but on those questions which ask you to evaluate a certain aspect of the ICO, it will be up to you to provide yourself with the best answer.
ICO Evaluation Questions
In order to perform an ICO evaluation, you have to be able to answer the questions on the evaluation form. To make sure that you can do so, the questions are posted below. These are all the questions that the ICO Evaluation scorecard features. These questions are vital for you to determine if the ICO is a good fit for your investing style and comfort level. The risks associated will be greater with a lower rated ICO, and less risk will be provided in those ICOs with a higher overall rating. The score that is suitable for you is a totally personal choice that you will have to make. The ICO evaluation scorecard is also a great tool to use to compare different ICOs against each other.
|Category- Product or Service|
|ICO Evaluation– Product Development Stage||Is the product ready for use? Is there a working prototype or MVP? How long until it is operational?|
|ICO Evaluation– Advantages Over Competitors||Does this solution have a distinct advantage?|
|ICO Evaluation– Community Reach||Is it mass market or specific niche?|
|ICO Evaluation– Uniqueness||Are there many other similar solutions or is this one of just a few, or even one of a kind?|
|ICO Evaluation– Patent ability & Copyrights||Is there (patentable) innovation and intellectual property?|
|Category– Use of Blockchain|
|ICO Evaluation– Blockchain use||Is blockchain technology essential? Does it make the solution significantly different and better?|
|ICO Evaluation– Security measures||Is it safeguarded against misuse and corruption?|
|ICO Evaluation– Custom Token Necessity||Is the token essential or could it be done just as well or better with fiat or Bitcoin?|
|ICO Evaluation– Decentralized||Is the system actually decentralized (more than just the tokens)?|
|ICO Evaluation– Wallets and mining||Are necessary storage and/or mining solutions sufficiently addressed?|
|ICO Evaluation– Further Advances Blockchain Economy||Does the solution contribute to the evolution of blockchain infrastructure and economy?|
|ICO Evaluation– Comprehensiveness||Does it cover the full scope of the problem and solution?|
|ICO Evaluation– Readability||Is it easy enough to understand?|
|ICO Evaluation– Transparency||Does it candidly describe and disclose where the project now stands, how much exists and how much still needs to be done, etc.?|
|ICO Evaluation– Business Plan||Does it contain a viable, comprehensive business plan?|
|ICO Evaluation– Technology||Does it present a well thought out technological architecture? Does it address implementational challenges?|
|Category– Development Roadmap|
|ICO Evaluation– Solid and Concrete||Is there a concrete and practical development plan (vs. just a conceptual vision)?|
|ICO Evaluation– Feasibility||Is the development plan realistic? Is it based on reasonable goals and timelines?|
|ICO Evaluation– Vision||Is there a larger, long-term vision?|
|ICO Evaluation– Educated||Does it seem as though a lot of know-how and experience went into the development plan?|
|ICO Evaluation– Vision & Execution||Is the project currently sufficiently far along in its development plan (relative to its vision and plans)?|
|Category– Business Model|
|ICO Evaluation– Concreteness||Is there a concrete business plan (vs. market descriptions, general sentiments, and fluff)?|
|ICO Evaluation– Feasibility||Is the business model realistic? Is it based on reasonable goals and timelines?|
|ICO Evaluation– Easy to Understand||Are the solution’s revenue streams, profit mechanisms, key KPIs, etc. clear and easy enough to understand?|
|ICO Evaluation– Cost Efficient||Is the project raising an amount of money that makes sense given what it needs to reach profitability?|
|ICO Evaluation– Legality||Is it safe from legal, moral or investor abuse?|
|ICO Evaluation– Intrinsic Value Assessment||Does the token provide access to some useful service or utility?|
|ICO Evaluation– Financial Tool Value||Does the token function as a financial instrument (analogous to equity)?|
|ICO Evaluation– Within regulatory Bounds||Is the issue of regulatory compliance sufficiently addressed?|
|ICO Evaluation– Legal Review Availability||Has the company published a legal review?|
|ICO Evaluation– Plan for Operation||Has the product or service been launched or deployed yet?|
|Category– Company and Team|
|ICO Evaluation– Company Age & Structure||Is the company already established? Has it raised funds before? Is it mature?|
|ICO Evaluation– Founding Members||Do we know who they are? Do they have LinkedIn profiles? Do they have solid, relevant backgrounds?|
|ICO Evaluation– Core Development Team||Is a solid, fully committed core team in place? Do they have online profiles showing sufficient relevant experience? Is their participation transparent?|
|ICO Evaluation– Project Advisors||What is the level of presence, added value, and commitment of the advisory board?|
|ICO Evaluation– Blockchain Experience||Are there enough sufficiently experienced blockchain architects and developers on the team?|
|ICO Evaluation– Developer Experience||Are there enough sufficiently experienced non-blockchain developers on the team?|
|ICO Evaluation– Business Expertise||Are there enough sufficiently experienced business developers on the team?|
|ICO Evaluation– Legal Counsel||Does the team have good legal counsel?|
|ICO Evaluation– Overall Skills Assessment||Does the amount of talent and skill in each area seem to fit the project requirements?|
|Category– Token Sale / Offering|
|ICO Evaluation– Fundraising Cap (Maximum Amount)||Is there a clear cap? Is the maximum raise amount modestly sufficient (as opposed to either greedy or insufficient)?|
|ICO Evaluation– Fundraising Minimum Amount||Is the minimum raise reasonably enough to carry out the majority of the development plan? Are there ‘raise amount’ dependent milestones?|
|ICO Evaluation– Allocation of Funds||Is fund distribution and allocation reasonable and justified?|
|ICO Evaluation– Tokens Held vs Tokens Sold||Is the ratio of tokens sold to those kept reasonable? Does it prevent the company from having too much control?|
|ICO Evaluation– ICO Campaign Strategy||Is the ICO well planned in terms of time, phases and scenarios?|
|ICO Evaluation– Media presence and following||Is the sale being talked about on Reddit, Bitcointalk, Social Media, Medium, etc.? Is information available and accessible? Is there interest?|
ICO Evaluation Scorecard Link
To access the scorecard, simply visit this Link. It will take you to Google Sheets, where the scorecard is live, on the web. To use it, simply make a copy or download it to your PC. You can also download a copy right here, if you wish. Simply click this Link. The Links can also be found at the beginning and end of this article.
ICO Evaluation Wrap-Up
Now that you have a good method to perform your ICO Evaluation, you can more readily find the ICOs that fit your investing style. While this ICO Evaluation tool will not guarantee you profits in the end, it will help you to limit your risk. There is no sure-fire way to guarantee the success of any ICO and you should always invest with caution. The more information you have, the better off you will be when it comes to risk mitigation. Use this tool along with any other tool you can to help you to achieve a prosperous ICO investing future.