Many ICO investors are drawn to the chance their coin will post bitcoin-like gains. Bitcoin’s value has increased tenfold, to $7,117, in the last 12 months.
In addition to investor cash, ICOs have attracted some celebrity hawkers. Boxing great Floyd Mayweather Jr. and Paris Hilton each pitched an ICO this year. Unlike regular stocks, offered in initial public offerings, ICOs are totally unregulated.
“It’s the Wild West,” Joseph A. Hall, partner at Davis Polk, told The Post.
“It totally reminds me of the dot-com boom,” he added. “It’s exactly the same mentality as 20 years ago, and it will probably end the same way.”
But after growing and proliferating for years away from the spotlight of regulators — like a bunch of possibly toxic mushrooms — ICOs have recently caught the attention of federal and state authorities.
- This week, the Securities and Exchange Commission issued an investor alert, warning investors to be on guard against ICOs, especially those that are pitched by celebrities. The SEC did not mention the Hilton or Mayweather ICO, and there is nothing to say ICOs aren’t legit investment vehicles.
- Federal prosecutors in Brooklyn charged a businessman with masterminding a bogus ICO. The Brooklyn ICO was said to be backed by diamonds and pricey real estate — but neither asset was behind the offering, court papers allege.
- New York state regulators have recently opened up a probe of ICOs, The Post has learned.
The state’s Department of Financial Services, an aggressive regulator run by Superintendent Maria T. Vullo, is looking into whether ICOs are actually securities, according to a person familiar with the investigation. What are ICOs and how do they work? They are a conceptual mash-up of a stock IPO and crowd-sourcing — IPO-like because they raise money for a particular purpose but like crowd-sourcing because investors don’t get an equity stake in the project.
That, for now, puts them outside of the SEC’s purview.
Investors in ICOs, using bitcoin or another cryptocurrency to make the purchase, are buying a small stake in a digital currency — say, one of a million coins minted for a specific purpose, like buying items in a video game or marijuana.
Investors believe the popularity of the coin will push up its value — much like bitcoin.
But if the ICO fails, the investor is left with nothing — and no one to turn to.
Last month, Tezos, a database company, raised $232.2 million in one of the biggest ICOs ever.
That deal is threatening to fall apart, however, over back-room spats that are fueled by questions of ownership.
In one of the wildest ICOs to come down the pike, one company, Fantasy Market — was looking to raise $25 million for an ICO whose coins would be spent on online sex shows.
“Using our token, you can control what the performers say and do during the show,” Fantasy Market’s typo-written offering paper explained.
Without much evidence, Fantasy Market, in its offering, promised investors its coins will increase in value by more than 1,100 percent — from less than 25 cents to about $3.00 — between Sept. 2 and Feb. 28.
The Fantasy Market ICO seemed sloppily put together — and after less than an hour of its founder, Jonathan Lucas, swapping text messages with this reporter, appeared to fold.
In the offering, Lucas claimed he was offered a National Security Agency-funded full scholarship to the prestigious Stevens Institute of Technology for a degree in Cyber Warfare.
When Lucas was told Stevens does not offer such a major, he at first insisted: “I am sure that I did not falsify my bio.”
Minutes later, Lucas admitted that Fantasy Market had raised less than the $2 million it says it will need — and then said he decided “in the past 48 hours” that he will return funds to investors.
One of the most influential forces in the ICO world is Emma Channing.
Her experience on Oct. 23 is a crystal-clear example of how popular ICOs have become.
Channing, the general counsel at ICO investment bank Argon Group, was in Las Vegas on that date to attend an industry conference.
When she went to the coffee shop downstairs in her hotel, other people in the café overheard her giving her name to the barista — and tried to physically restrain her from leaving so that they could pitch their ICO ideas, she told The Post.
“I was surrounded by people six deep,” she said. “One of the people who was the most vocal was holding my arm and insisting he was going to put gene therapy on the blockchain,” she said, referring to the technical name for the technology behind the bitcoin.
Argon is the only broker-dealer that raises money for ICOs, Channing said. The company has contributed to fundraising for $70 million in ICO projects, including for venture capital fund Blockchain Capital.
Argon gets so many pitches — about one every two minutes — that they’re going to charge people one Ethereum token, or about $295, just to send an e-mail, she said. Those whose pitches they like will get a refund, she added.
“People have been itchy to get in on the boom,” she said, in an obvious understatement.
Ironically, while the bitcoin bull market has fed the ICO frenzy the last year, it may also be a force that slows the market.
Since many use bitcoin to buy into an ICO, it has gotten too expensive, she said.
“Cryptocurrency people are watching their bitcoin go up by $500 a day. Why are they going to give it to you now?” Channing said.
That prediction seems to already be coming true.
In October — when bitcoin surged about 50 percent to $6,377.44 — ICOs attracted less than $400,000, or about half of what it pulled in September, according to coinschedule.com.