The internet coin offering (ICO) is a concept that looks like a rip-off wrapped in a mystery. ICOs are the ultimate Ponzi stocks, offering a unique nancial market with minimal supervision for those who want to invest in – or should we say donate to? – high-tech rms with a big burn rate and zero pro ts. It’s almost the perfect launch vehicle for many tech start-ups.
Once again, 10 years after the global financial crisis, nearly 20 after the tech bubble burst, the storks are back in full production. ICO issuers raked in more than $5 bn in ICOs in the rst quarter of 2018, the same as they raised in the whole of 2017 and up from a mere $95 mn in 2016. Literature-loving investors might be reminded of Milo Minderbender, Catch 22’s financial colossus, whose comrades in arms would find stock certificates for Milo Minderbender Enterprises that he had left in empty first-aid boxes or parachute lockers in place of the lifesaving supplies they were looking for. As financial markets are arguably set to dive underwater, we can be sure Minderbender would have relished the infinitely enigmatic opportunities offered by ICOs.
With ICOs, investors use ‘real’ money – of the kind your local bar would accept – to buy crypto-currencies assiduously minted by computers crunching through fruitless and increasingly tedious calculations. Crypto-currency is minted or mined by people accountable to nobody, stored in large servers that are rather less secure than Fort Knox – and have been looted as easily as a piggy bank in recent years.
As with regular stocks and shares, cryptos are worth what others are prepared to pay for them; it makes the Treasurer’s signature on a dollar bill seem quite solid security. After all, holders of dollar bills at least know where the government lives, while holders of crypto-coins are not even sure who invented them, let alone know where they are at any given moment. To compound the uncertainty, ICO owners then use the crypto-currency to buy ‘tokens’ in tech start-ups that typically lack the kind of information investors usually deem vital. They have no earnings or records and have management teams with tenuous track records and an often nebulous business plan.
The tokens themselves are like ‘metashares’, with no back-up other than vague unenforceable promises. They carry no votes, no ownership in the enterprise and no means of exercising any control over the issuers. For such issuers, you can see why SEC filings would look like useless bureaucracy, an impediment to free enterprise. Besides which, an IPO takes months and months, while speed is the essence of smash-and-grab raids like those being planned.
If you have the faith to invest in a company with no revenue or earnings, no shareholder votes and no dividends, ICOs are clearly for you. Evanescent websites promote them, offering ‘independent’ analysis and assessment of prospects. In the absence of any hard data, we presume there are crack teams of crystal-ball readers who cash the checks or tokens from issuers during their lunch breaks.
The sites gloat that ICOs cut greedy merchant bankers and Wall Street insiders out of the equation but the quid pro quo is that there’s no protection for ICO investors in a eld dominated by Russian exile-owned companies operating in offshore tax shelters. Somewhat unbalanced by events in other quarters, social media giants like Facebook and Google are limiting ICOs’ advertising. But the web is wide and the wide boys are setting up sites to pull in the marks. And come they will: history shows that if you sell black tulip derivatives denominated in Polish zlotys on the Lagos futures market there will be takers!
This article first appeared in the summer 2018 issue of IR Magazine
