We have to make rules for ICOs now or their benefits will die too soon

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The initial coin offering (ICO) is taking over. CoinDesk reports that ICO events raised more than US$327 million in the first half of 2017. And that doesn’t even include the US$200 million+ raised by Tezos recently.

There’s no doubt that at this moment, an ICO is the most direct path to millions of dollars in funding. The path is so direct and, perhaps, easy that even a project like the Useless Ethereum Token (or UET, which is an ICO that promises to issue a truly useless token with no purpose) has been able to raise more than US$70,000.

To put that in perspective, startup founders have had to build strong minimum viable products, jump through incredible hoops, and (sometimes) uproot their entire lives to join an accelerator program or find an angel investor who would cut a check for US$20 to US$100,000. The UET threw together a website saying they would do nothing, and they raised US$70,000. Incredible.

It is, of course, an outlier. But the problem is real. There are many projects raising between US$5 million and US$15 million with nothing but a napkin-stage idea. The ICO is a brilliant mechanism — one which will enable and incentivize developers to build potentially world-changing blockchain-backed applications — but it won’t be around for much longer unless the community raises the bar.

Here are a few starting points and questions to ask:

White papers should include a business plan

There is certainly something to be said about projects or companies that are exploring new technologies and are not putting profit first. There’s a place for that, and given the state of blockchain development, maybe there should be more than is typical.

But we aren’t curing cancer or building a base on the moon. We’re deploying advertisements, paying content writers for their work, and betting on e-sports. These are all worthwhile and practical pursuits, things that should have some kind of business purpose or revenue plan. Without it, all we’re doing is having fun burning cash, ethereum, bitcoin, whatever. That’s not a long-term strategy.

Early availability on an exchange is a must

It’s stunning that the market accepts an ICO pledging to accept currency from a token buyer with only a vague pledge to be listed on an exchange within 30 days or six months. I recently read one white paper that said they have no definite timeline.

A brilliant piece of the token issuance concept is that you can exchange each unit for something of value, whether that be for something inside of the project software/product or to change it for other cryptocurrency. An exchange may not be necessary for use in-product, but the lack of insight and freedom is counter to the spirit of blockchain. There should be some kind of standard in this area, which leads me to my next concern.

Who’s watching for market manipulation?

ICO white papers make promises all over the map—from destroying all remaining tokens at the conclusion of a pre-sale to withholding 90 percent of the authorized tokens for future issuance. Each of these and everything in between are fine, but who’s keeping this in check?

If the project has unchecked power to manipulate the market for their benefit, it’s important that we take a page from angel investor best practices and place major emphasis on the makeup of the team.

Much of this comes down to trust. Trust in a world with no real regulation. Trust that the team will be able to execute what they say they’re going to. Trust that the team will be able to figure it out when things don’t go right.

These are vital questions to ask any entrepreneur and it appears that we’re really not asking these questions.