Crowdsales in the crypto space are largely conducted and considered as either unregulated forms of crowdfunding or unregulated exchanges of cryptographically represented value. However, regulation interpretation and laws vary by jurisdiction. They involve and relate to the development and use of experimental software, technologies and even business models that may not come to fruition or achieve the objectives specified in the information provided to contributors (whitepaper).
Icotokn warns its users that the purchase of tokens represents a very high risk to any participating contributor. Activity should only be undertaken by those with substantial technical knowledge and that are also able to understand the specific network and related token being offered. Careful due diligence should be undertaken on the projects, network, tokens and team behind any token sale and with full understanding that your contributions may not ultimately result in a useable or valuable token and the value of your contributions may therefore be subject to total loss.
The most common risk factors with token sales and cryptocurrency contributions are:
1. Early Stage Technology. Tokens are normally created to be used to develop a network that is based on or in some way involved with distributed ledger technologies (Network). You should only engage in token sales if you understand and accept that the use of tokenised stores of value is highly experimental. Participation in the proposed Token sale and Network project therefore represents a very high risk to Contributors. Token issuing entities (TIE’s) will normally invest in software and new technologies and modes of doing business that in most cases will still be in an early development stage and unproven. There is an inherent risk that the software, technologies and related businesses invested in by the Token Issuing Entity could be unfit for their intended purpose and/or not have the value or utility expected.
2. Main Protocol. Many of the Network project technologies and Tokens will, at least initially, be based on the Bitcoin and the Ethereum protocols. Any malfunction, breakdown, forking or abandonment of these protocols may have a material adverse effect on the Network or the Tokens. Moreover, advances in cryptography, or technical advances such as the development of quantum computing, could present fundamental risks to the value of such protocols.
3. Risk of software weaknesses: The Network and the Tokens, the Contribution software and other involved software and technology and technical concepts and theories are likely to still be in an early development stage and unproven, and there is no normally no warranty that the process for receiving, use and ownership of Tokens will be uninterrupted or error-free and there is an inherent risk that the software, Network, Tokens and related technologies and theories could contain weaknesses, vulnerabilities or bugs causing, inter alia, the partial or complete: loss of Tokens; inability to use Tokens; and/or lack of usefulness of Tokens.
4. Risk of blockchain mining attacks: As with other public blockchain based systems that depend upon independent miners, any Network may be susceptible to mining attacks including but not limited to double-spend attacks, majority mining power attacks, “selfish-mining” attacks, and race condition attacks. Any successful attacks present a risk to the Network, the TIE, Contributors, the expected proper execution and sequencing of Tokens transactions, and expected proper execution and sequencing of software computations.
5. Cryptocurrency and volatility. The TIE may wish to store or convert cryptocurrency contributions into one or more fiat and/or alternative cryptocurrencies and there could be significant difficulties in making and managing such cryptocurrencies and funds including relating to the lack of ready convertibility between fiat currencies, cryptocurrencies and Tokens and the difficulty in being able to deal with such assets via traditional market counterparties and intermediaries. If the value of cryptocurrencies fluctuate unfavourably during or after the Token Sale, the TIE may not be able to fund development, or may not be able to develop or maintain the Network in the manner that is intended. In addition to the usual market forces, there are several potential events which could exacerbate the risk of unfavourable fluctuation in the value of cryptocurrencies, including but not limited to another DAO-like attack on the Ethereum network; or significant security incidents or market irregularities at one or more of the major cryptocurrency exchanges.
6. Risk of loss of your credentials: If your own crypto-wallet credentials are lost or stolen, the obtained Tokens associated with any Contribution will be unrecoverable and will be permanently lost. A private key, or a combination of private keys, is necessary to control and dispose of Tokens stored in your wallet. Accordingly, loss of requisite private key(s) associated with your wallet will result in loss of such Tokens. Moreover, any third party that gains access to such private key(s), including by gaining access to login credentials of a hosted wallet service you use, may be able to misappropriate your Tokens. Any errors or malfunctions caused by or otherwise related to the wallet you choose to receive and store Tokens, including your own failure to properly maintain or use such wallet, may also result in the loss of your Tokens. Failure to precisely follow the procedures set forth in any Token sale documentation for buying and receiving Tokens, including, for instance, providing an incorrect wallet address, or providing an address that is not ERC-20 compatible, may result in the loss of your Tokens.
7. Cybercrime. The acquisition and management of cryptocurrencies and Tokens is inherently subject to the risk of cybercrime that is difficult to manage and mitigate. This may result in concerted attempts and even successful attempts to hack the Network, Token Sale process and the Sites and software used to manage contributions received in respect of Tokens and other software or technology components and to defraud Contributors and the TIE and the Token Sale process may be subject unauthorised access, hacking and/or theft of some of cryptocurrency and Token assets. The TIE is unlikely to be required to insure the assets of the TIE or may find it too difficult to do so given commercial conditions for such insurance. Any unauthorised access or cybercrime may result in theft or loss or inability to access Contributions, impacting the ability to issue Tokens, the value of Tokens and may also impact the ability to develop and launch the Network.
8. Failure or Abandonment. The Token Sale event itself or the Network project may be fully or partially abandoned or required to be re-structured for a number of reasons or remain technologically or commercially unsuccessful, or be shut down for many reasons including e.g., lack of interest from industry and/or the public, changes in law or regulatory issues, lack of funding, lack of commercial success or prospects (e.g. caused by competing projects). There is no assurance that any Tokens or rights to Token acquired by Contributors will have the value expected or any value at the time of realisation or use of any Tokens. Contributors should understand and accept that the Contribution and/or the allocation, use and ownership of Tokens, carries significant risks that could lead to the Tokens being unusable or valueless particularly: as a means to exchange information, services and value with other Network participants; and given that that they are not normally capable of being exchanged or redeemed to the TIE in return for fiat or alternative cryptocurrencies.
9. Regulatory risk: There is a risk that the offer and or use of the Tokens could be prohibited under applicable securities law. DLT and blockchain technology allows new forms of interaction and it is possible that certain jurisdictions will apply existing regulations on, or introduce new regulations addressing, blockchain technology based applications and token sales, which may be contrary to the structure of the Contribution process and which may, inter alia, result in substantial modifications of the Network and Token utility, including potential loss of Tokens or Token Value for Contributors. The TIE or any related entity may cease operations in a jurisdiction in the event that regulatory actions, or changes to law or regulation, make it illegal to operate in such jurisdiction and/or use the Tokens or make it commercially undesirable to obtain the necessary regulatory approval(s) to operate in such jurisdictions.
10. Risk of lack of statutory protection: Tokens do not represent deposits and are not subject to any statutory insurance or guarantees. In the event of insolvency of a TIE or related or associated party that provides the Network on which Tokens are intended to be used there will be no protection in place to receiver losses on Contributions or Tokens.
11. Risk of governance failure: Tokens normally confer no governance rights of any kind with respect to the Network or TIE. All decisions involving a TIE’s (or related or associated party’s) products or services will usually be made by the TIE or related or associated parties at their sole discretion and without engagement or consultation with Contributors, including, but not limited to, decisions to discontinue the Network or Token or to sell or liquidate the TIE. These decisions could adversely affect the Network and the utility of any Tokens you own. Whilst TIEs are subject to the normal normal legal, accounting and tax standards, they may be operated by persons with very limited actual business experience.
12. Risk of lack of oversight: Most token sales are not structured as an offer of securities or a promotion, invitation or solicitation for investment purposes or are not intended to do so. Unregulated Token sales are not therefore intended to represent a security or similar legal interest. The terms applicable to unregulated contributions are not normally therefore subject to financial services offering requirements including in respect of documentation or prospectus formats that must meet certain standards required by law and market participants may not be subject to independent supervision. The impact on Contributors for investing in unregulated Tokens include that there is no independent review or oversight required by law, and the accounts of Token offers may not be subject to audit requirements.
13. Risk of a lack of a suitable legal remedy: In the event of a dispute as to whether: (i) Contributions have been appropriately used to meet any legally binding representations made in any Token sale documentation; (ii) the Network or Tokens have been developed within the scope of the legally binding representations or function as represented; (iii) the terms and conditions of the Token sale or exchange have been breached; or (iv) any other potential legal claim against a TIE or any related or associated third parties (Respondents), it may prove very difficult and costly for Contributors to assert their legal rights in their home jurisdiction (based on applicable law and jurisdiction and enforcement issues) or in the jurisdiction of the Respondents and this may dissuade Contributors from asserting their legal (including contractual and statutory) rights. In addition, even if a claim is brought it may prove difficult to distinguish between legally binding and enforceable contractual representations, warranties and terms from mere statements of the intended potential future use of a Token that are not sufficiently certain legally binding promises and representations. Terms and conditions of Token sales will also normally take significant care to warn Contributors about the many risks involved in Tokens, Token sales, and the viability of the underlying Network or platform on which Tokens are intended to be used and this may also make it very difficult to bring a claim successfully.
14. Risk of fraud from bad operators and agents: As a largely unregulated form of crowdfunding there is an even greater risk than for regulated securities that some bad actors and operators will use Token sale events as a ‘get rich quick’ scheme and fail to even attempt to deliver on the promises and representations made during the Token sale. First and foremost, Contributors must remember the potential for people to falsely attempt to gain financial benefits by misrepresentation. Contributors must assess the quality and credibility of the whole team involved in a Token sale and look carefully at any professional advisors that are referenced in any Token sale as the risk of fraud is significant in this sector particularly during this initial wave of excitement and whilst industry standards and regulatory positions are being defined. In addition, Contributors should look very carefully at the quality of the jurisdiction of any Token issuer and the specificity of the representations made regarding the use of proceeds from the Token sale.