ITO Should Do List
Updated based on feedback
Consider these pegs in the ground. Tell us if a) any pegs missing b) any of these pegs are broken (defined wrong) or in the wrong place. If the peg looks good, lets take it to the next level so that we can define it in both legal and technical terms.
Cap the amount to be raised. That was the DAO problem. Let investors compete on time not amount. If the amount to be raised is open, scammers can create hype and raise a lot and disappear.
Stage 1: Technical risk. White paper, maybe some early code on Github.
Stage 2: Market risk. Prototype/MVP. Accessible via at least a public Beta.
Stage 3: Scale risk. Where big funds and ibankers like to play.
Let market challenge the Issuer. For example, if Issuer says we are Stage 2, potential users/investors should be able to say “we don’t see it” (which is different from an opinion on how good it is).
- Human ID. All the founding team, Officers, Directors should offer enough data to show:
• Where they live (ie in what jurisdiction you could sue them).
• What work they have done in the past and what entities they are affiliated with (ie are they a credible team to back). LinkedIn Bio.
The data should be enough for investors to do background checks if they want to.
Declare Legal jurisdiction. In what country is the ITO Issuer based? This defines what laws the entity is subject to.
Only accept payment in a cryptocurrency. This just adds a tiny hurdle to deter investors who should not be taking this risk if they don’t even have funds in Bitcoin or Altcoin.
Declare Accredited Investor status. An Issuer may say "we are only open to Accredited Investors” (like Z Cash did) or leave it open as many others have done. Many people have lost respect for the Accredited Investor hurdle because it is a self-declared status. Yet it can be a hurdle that gives an investor pause to think and that is good. The requirement is simply that Issuer must define which approach they are taking.
Define convertibility and liquidity. Define how you can convert to Bitcoin (assuming investors know how to convert from Bitcoin to Fiat). Defining Liquidity is key and before a Token is traded the answer has to be that there is zero liquidity in which case the Issuer may want to outline their path to liquidity for investors to scrutinize.
Define Reporting. Will Issuer report on Use Of Funds, Cash Balance, Burn Rate? What else? On what frequency. The Code of Conduct does not define Reporting, just that the Issuer must define how Reporting will be done.
Define use of funds. This relates to 1. A massive seed round should raise suspicions, but if the plan is good, investors can make their own decision.
No social validation investing without total transparency. Saying “brilliant cyber investor Y (bought Bitcoin in 2010 and ETH in 2014) is an investor” is a good way to scam naïve investors (who should be doing their own diligence not blindly following a celebrity). If Issuers want to use social validation, they must define:
• How much the investor bought ($5k in a $5m round for somebody with a huge net worth is no more than a dabble)
• What terms they got. Any other relationships need to be declared.
Note: this transparency is only needed if social validation is part of the pitch.
Issuer Entity Mandatory data
Current ownership structure (cap table)
What type of ITO is it? May define regulatory status and investor interest and what data should be mandatory;
Digital assets that are collateralized or backed by another existing asset: These are digital assets whose value is directly linked to an analog asset. This digital asset class is representing the tokenization of the conventional world. For example, The Royal Mint Gold (RMG) which is live-tested on the CME (read more The wave of Gold trading technology is a game changer coming from the West); or the SEC approved digital preferred equity shares of Overstock on the T0 platform (read more in T-Zero sings “Love me do” to the SEC with its Blockchain Series A Preferred Shares).
Protocol Tokens governed by a coded protocol on a blockchain: The value of such tokens can be linked to their scarcity, their adaptation and their anticipated network effects; and/or their potential as a store of value or as a currency. For example, MLN (Melonport), ETH (Ethereum), BTC (bitcoin). Protocol Tokens are digital assets that have not made their way yet into the traditional asset management world. We are seeing some very early ventures like Polychain Capital: A hedge fund investing at the Protocol layer of Web 3.0 .
Derivatives of digital assets: For example, the 1year forward Lykke forward issued earlier this year and trading on Lykke exchange.