Many people ask how common is fraud in the world of initial coin offerings.
My answer is, it's very common.
In fact, I think it's quite pervasive.
The Wall Street Journal did a very interesting analysis of
1,450 ICOs where they are able to get white papers.
White papers are the documents that ICOs distribute on
the Internet to try to persuade people to send crypto into their accounts.
The way you buy an ICO is,
you don't go into the bank and say,
here's a check for $1,000.
I'd like $1,000 worth of the ICO.
Rather, you send typically bitcoin or ether to the promoter of the ICO, and in return,
they give you back crypto which represents
the thing that is going to be the value in the system that is still to be built.
Well, the Wall Street Journal analyzed 1,450 of these,
these white papers, and they found some fascinating things.
They found, for example,
that in 111 of these ICOs,
entire segments of the white paper
were plagiarized from other segments of the white paper.
They view that as an indicator of fraud,
and I agree, but it's also a very intelligent indicator of fraud.
Because if you have an ICO that effectively raised $20-$30 million from people,
and you want to run an ICO yourself,
why not copy a successful ICO in order to help commit the fraud that you're gonna commit.
So, this is rational plagiarization from that perspective.
They also found that a 121 of these ICOs,
there was no disclosure of who the employees were,
who the founders were,
or there was disclosure of people who didn't exist.
They made up phantom people and they borrowed
pictures from stock locations on the Internet,
or in some situations they said that it was backed by certain people,
you contact the people and they say, never heard of it.
All right? Have no idea what's going on.
A third red flag of fraud that The Wall Street Journal
looked at was whether there was a functioning website.
You would think that if you're raising money in order to do an ICO,
you would have a functioning website in conjunction with your ICO.
Well, in at least 48 cases,
the Wall Street Journal found no website.
In addition, in 25 cases,
the Wall Street Journal found that there was a guaranteed financial return.
If there's one thing that you know in the world of securities and securities offerings,
you don't guarantee people financial returns.
So, I think the journal rationally took this as a hallmark of fraud.
In addition, I think the journal's analysis
was quite modest because they didn't point out
the fact that all of
these initial coin offerings were not registered with the Securities and Exchange Commission.
If the SEC is correct, and I think it is,
that in each one of these situations,
these initial coin offerings involve the unregistered sale of securities.
What the Wall Street Journal found was
1,450 instances of violations of the federal securities laws.
And there's a very interesting thing here.
Even if there's no fraud in these 1,450 situations,
the failure to register gives rise to
legal liability on the part of the organization selling the initial coins.
The federal securities laws as
a penalty for the failure to register securities that should have been
registered creates something that's known as the rescission right or the registration put.
What that means is,
if you buy in an Initial Coin Offering and the offering should've been registered,
but it wasn't, you have the right to go back to the seller and to say,
here are my coins,
I am returning my coins.
I want my initial purchase right back.
So, in other words, there is the right to return the coin and get
your cash back for a year after
the transaction if it should have been registered but it wasn't.
But as a practical matter,
if the seller is in Minsk,
you're not gonna go to Minsk.
And the seller is gonna look at you and go, who are you?
And the money is in Bitcoin and it's not coming back.
Another indication of the level of fraud over here.
Researchers at University of Pennsylvania conducted
a fascinating analysis that took a tremendous amount of elbow grease.
What they did is they read the white papers for the 50 largest ICOs in 2017.
They then actually looked at the code
associated with the coins that were going to be sold.
And what they asked is,
how frequently did the coins actually
reflect the promises that were being made in the white paper.
In other words, were you delivering to me
code that accurately reflected the promises that you made in the white paper.
In 40 out of these 50 situations, they found major,
major discrepancies between the promises or the descriptions
in the white paper and the actual coding of the tokens and coins.
So, that means that,
in 80 percent of the largest ICOs in 2017,
we have a discrepancy that is not inconsistent with the notion of fraud.
You promised me something.
You gave me something quite different,
and each one of these situations according to this research,
the purchasers didn't get something that was promised to them in the white paper.
Other than that, there are absolutely no problems in this sector.