In December 2017, SEC chairman Jay Clayton issued what amounted to a warning to investors, telling them what to consider before participating in an ICO. This due diligence checklist includes:
- Is the product legal? Is it subject to regulation, including rules designed to protect investors? Does the product comply with those rules?
- Is the offering legal? Are those offering the product licensed to do so?
- Are the trading markets fair? Can prices on those markets be manipulated? Can I sell when I want to?
- Are there substantial risks of theft or loss, including from hacking?
These questions are really basic, and should not appear amiss to any experienced investor. The fact that they need to even be brought up shows how frothy the ICO market had become.
The simple fact about ICOs is that they are derivatives, and as Warren Buffett has stated repeatedly, derivatives are the financial equivalent of nuclear bombs, because they create new debt and their value is contingent on the value of another underlying financial instrument. If the underlying financial instrument should quickly shift or lose value, then so will the value of the derivative.
