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What are the 4 things the Tezos affair has proved will be pivotal if ICOs are to enjoy a successful future?

Since raising over $232m in July during its Initial Coin Offering (ICO), Tezos have been tainted by an alarming run of allegations.  As a result the value of its futures has fallen by around 75%.

The problems trace back to an announcement that claimed the Tezos platform was still “in the alpha stage” which mean investors couldn’t count on seeing anything tangible or useable until February 2018 at the earliest.  These claims were compounded further by allegations of internal conflicts of interest within the most senior echelons of the Tezos management team.

The sharp fall in the value of the associated futures has left investors in complete chaos.  None of them can exit their positions until the platform launches and the tokens that were sold during the ICO have been officially allocated so that there’s something concrete to show for their investment.

A San Diego law firm is investigating the matter in an attempt to file a class action suit to try and claim back the investors’ money.  Their argument hinges on the fact the parties involved breached U.S. securities laws during the ICO, most particularly because the tokens sold should have been registered with the SEC as securities but it appears they never were.

But while the fallout from this ICO has grabbed headlines because of the eye-watering sums involved, when you pull the debris apart we seems yet again to be covering some well-trodden ground. 

If ICOs are going to become a viable route to funding new businesses, those behind the offerings need to up their game and this case alone has provided 4 invaluable lessons that have to be followed if ICOs are going to enjoy a successful future.

  

1 To thine own self be true

According to the surrounding publicity the underlying principle for the Tezos platform was to provide technology that would increase the security around Ethereum and Bitcoin and, therefore, the level of trust users could place in those networks.  However, the actions of those behind the launch would suggest the creation of trust probably wasn’t all that important to them.

How can investors trust the claims they’re being sold ahead of an ICO if so many companies are clearly willing to act in total opposition to the claims they’ve made?

2 Give investors total transparency

Tezos is owned by Dynamic Ledger Solutions (DLS) who are owned by Arthur and Kathleen Breitman and their venture capital partner, billionaire Tim Draper.  There is evidence VCs were offered a pre-sale discount as far back as September 2016 and again after the sale with 8.5% of those sales going straight to the Breitmans and Mr Draper.

When those pre-sales began, the company was valued at $6m even though the platform being sold was barely in never mind out of its alpha phase.  When the ICO was launched it was valued at $150m.  What has happened to drive that valuation so high?  It certainly isn’t the release of the promised technology. 

Similarly, while Mr. Draper’s name was used to promote the launch, it has since become apparent he only ever planned to maintain a short positon and had only taken that position under preferential terms.  This was never made public.  While this isn’t the place to argue the legalities of those circumstances, we’d suggest the fact it was never openly discussed was not in the other investors’ best interests.

Shouldn’t all of this information be made available so investors can make an informed decision?

3 ICOs need strong international governance … now!

The Tevos case is riddled with a series of worrying developments.  Funds have been diverted to a numbers of different entities, there is evidence of early profit taking despite there being no real product, Tezos’ IP has been transferred and the founders will hold 10% of all tokens generated at ICO (and benefit from any increase in the value of Bitcoin in the meantime).

More worryingly there doesn’t seem to be any signs that the founders have any interest in delivering what they promised investors in their pre-launch material never mind return the $232m they’ve raised with any type of premium.

If an internationally recognised regulatory framework isn’t introduced, what is to stop a long list of companies doing exactly the same?

4 Does the structure of the ICO need to be changed?

There are a number of changes that could help ICOs to work better for investors.  Greater regulation should ensure greater transparency for investors and greater accountability for founders and together that should reduce the likelihood of the pre- and preferential selling that underpinned the Tezos launch. 

However, we’d suggest regulators go one step further and insist the funds involved are controlled by a recognised and trusted third party, at least until there is a tangible product in play and until the exact allocation of tokens has been made.  This one move should minimise the possibility of those behind the launch disappearing with their investors’ money.   

A ‘cool off’ period needs to be included so that both founders and investors can pull out of their position with no financial penalty for either side if things aren’t progressing as they should be.  

Without these changes our fear would be that eventually – and that time may not be far off – investors will retreat altogether from ICOs and look for a new means of investing.  And given recent history, there is nothing to suggest the next big thing won’t be just as manipulated and misused by the less than scrupulous just as the ICO has been.

If you have been affected by a fraudulent ICO or by any other type of digital scam and want to discuss how best to get your money back, call us today on 020 7792 5649 or email us at info@selachii.co.uk

 

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