Perils of Investments in Private/ Pre Sales of Tokenized Blockchain Projects
Because the market is crowded with ICO/IEO/IDO’s, it is difficult to attract the attention of investors. Many ICOs are left with a limited marketing budget. This means they can opt to start with a private sale to collect the finances needed to bring the product to market and then sell it publicly.
Investors want to participate in an ICO at the earliest possible stage to profit from the greatest possible discount during the private sale. The term "Private Sale" is sometimes used interchangeably with "Pre-sale," yet both terms relate to the same thing. This is the first time the coins are made available to a closed network of investors. These investors might be family members, personal friends, business partners, or well-known capitalists.
Overall, the token pre-sale will either generate revenue to continue building the product in its infancy or to support the activities leading up to the ICO launch. A token pre-sale happens prior to the start of an initial coin offering. In a pre-sale, the company sells tokens while they are still in development, before their general release. Due to the significantly increased risk associated with participating in a token pre-sale, the tokens are often given at a discount.
Moving forward, we will explore the most prevalent risks associated with private and pre-sales tokenized blockchain projects.
One of the hazards associated with cryptocurrency pre-sales is that investors are investing in something novel and untested. Each month, dozens of new cryptocurrencies enter the market, but the majority will never gain widespread adoption. This implies that they may ultimately lose all of their monetary worth.
Often, the creators of private sales for blockchain projects are not upfront about the information they present to investors. Essential and fundamental information, such as who the founders are, the project's risks, the token holder's rights, and how the funding will be utilized, is communicated in very brief words, if at all.
Without this kind of information, investors will have a difficult time determining the genuine worth of an ICO and differentiating legitimate from fraudulent ventures. This lack of transparency also makes it difficult to price the tokens efficiently.
ACChain was a very attractive token initiative established in Shenzhen, China, that raised $80 million, but it rapidly became evident that all was not as it seemed. Nevertheless, a photograph of the ACChain headquarters was released, but it turned out to be an empty room. By that time, the firm had abruptly ceased operations and vanished without a trace.
Speculation and Manipulation
Many individuals participate in private sales for speculative purposes in the present climate. This extremely speculative nature of private initial coin offerings contributes to the extreme volatility of token values exchanged on specialized trading platforms. Furthermore, these platforms are not regulated by financial authorities. Price changes of tens or even hundreds of percentage points on a daily basis are not uncommon.
This also contributes to the fact that the multitude of coins suddenly accessible to the public may detract from the value of the coins they first purchased when the actual ICO occurs. Hence, those who get early in the private sales might be left with no funds.
Anonymity - Disguising Illegal Funds
Due to cryptos' decentralized and anonymous nature, including tokens issued in a private sale, it is difficult or impossible to trace transactions to actual individuals. Additionally, enormous sums of money may be generated quickly using private sales. As a result, private sales of tokens are ideal for laundering illegal funds. Financial institutions' provision of services linked to pre-sales or cryptos might soon generate a major contradiction with regulatory provisions prohibiting the use of the financial system for money laundering or terrorism financing.
Owing to the pseudo-anonymous nature of private sales, funds invested in them run a greater risk of being exploited for criminal purposes. Investors are likely to suffer undesirable consequences if authorities investigate any claimed illegal activity involving the token issuer, its business operations, or the token's trading.
Great Vehicles for Scammers
Due to the international nature of blockchain technology, private investors from all around the globe may participate in a private token sale. Simultaneously, blockchain technology's anonymous and cross-border nature allows sophisticated variants of old pyramid schemes that are difficult to detect. Thus, the current excitement around initial coin offerings provides an excellent opportunity for scammers to prey on investors fearful of missing out.
Additionally, the underlying blockchain technology is still in its infancy, which means that there is a genuine danger of coding flaws or token theft. This might result in the tokens being permanently lost or access to the tokens being denied.
Reinforcing this stance, the Securities and Exchange Commission of the United States has issued charges against the issuers of two ICOs (REcoin Group Foundation and DRC World) for providing investors with false and misleading information.
Emerging Ponzi Scheme
A Ponzi scheme is one in which fraudsters get new investors to give them money and then distribute a portion of the money to their earlier investors as dividends. All the while, the earlier investors believe that the money comes from the company's successful commercial operations, not from additional investors. Recently, OneCoin, a cryptocurrency without a blockchain, attracted millions of investors and amassed billions of dollars in profits. Later on, it was revealed that OneCoin was nothing more than a Ponzi scam that used fancy marketing strategies to establish credibility and fool investors. During a raid, 18 of the company's founders were detained. However, several Ponzi scams continue to plague the start-up environment daily in the ICO realm.
Likewise, Bitconnect defrauded investors out of an estimated $4 billion in a multi-level marketing-driven Ponzi scheme, drawing them in with boasts of an unbeatable trading algorithm that, perhaps unsurprisingly, never existed. Surprisingly, they were not content with duping their victims once, launching a second fraudulent ICO, BitconnectX, just as their first business collapsed.
Paving the Avenue for Exit Scams
Additionally, cryptocurrencies are volatile - their value may rapidly fluctuate. You may purchase cryptocurrency during a pre-sale, only to watch its value skyrocket before dropping to a price less than what you paid for it.
As the name implies, exit scams involve founders fleeing with investors' money after the ICO. The founders make the ICO, advertise it, persuade investors of its authenticity, and then steal their money and vanish. For example, in 2017, the crypto "smart contract" business Confido disappeared with approximately US$350,000 from investors and then deleted all their social media profiles, effectively concealing their deception.