ICO’s have been painted in a very negative light and a lot of that is with good reason. Plenty of ICOs have exit scammed and utilized ICO's as a vehicle for private equity exits. However, people seem to forget the fact that many IPOs operate under similar pretences, instead of capitalizing on ‘blockchain’ terminology, they focus on commodities.
If you look at any stock exchange, you will see hundreds of ‘resource companies’ that are listed and publicly traded. These companies constantly raise millions of dollars while knowing full well the likelihood of them ever;
These companies may actually be worse than a lot of ICO scams. Why you say? Firstly they are operating in a ‘regulated’ market by securities regulators. Secondly a large majority of the people that invest in these IPOs are persuaded to do so by their brokers rather than on their own intuition. Why do the brokers advise their clients to invest? There are two main reasons:
Underwriting the stock means that should the broker not be able to sell all the stock to retail investors, the broker themselves will purchase the remaining stock that they have been unable to sell. Thus leaving the broker ‘holding the bags’.
Post-IPO, the same brokers that sold the initial stock will provide ‘analyst coverage’ on the stock which again is paid by the company, reducing the objectivity of their analysis and validity of their recommendation. Of course while the broker is holding the bags they are unlikely to give negative analysis given it affects their underlying position.
Now after a year of unsuccessful exploration the IPO-d company starts running out of money, all while paying board members and executives handsome salaries, the company comes back to the broker advising they need to raise more money. The broker gets back to work and taps the original investors from the IPO and offers them stock at a discount to the market price and advises the company has ‘good news’ due. Of course original investors have the chance to bring down their average and receive stock at a discount so they oblige, in addition should they not participate their position will be diluted due to the flooding of millions of new shares on the market.
This cycle will continue for a few years before the company eventually gets taken over for a discount to their listing price or declares bankruptcy. By that time the broker has usually exited their position leaving the initial IPO investors and retail holders holding the bags. The executives and board members all leave after collecting a substantial salary over the years.
While everyone is so quick to dismiss ICOs, lets not forget IPOs that are supposedly regulated!
