By: Laura Marissa Cullell
Senior Blockchain Consultant
The increase in ICOs has created a diverse space for a variety of experts. Advisors for an ICO have now become a mandatory must-have in order to ensure credibility of an ICO.
Advisors for ICOs come in an array of different experiences, and capacities. They often serve as people to vet an idea, aid in structuring the ICO/token sale, navigating through product development, and ensuring legal compliance to name a few.
If you have been asked to advise for an ICO but don’t know where to start or what to expect, we’ve got you covered. This week, Chinmay Patel, CEO of BlockX Labs offers some tips on things to consider before becoming an advisor for an ICO. Chinmay is currently an Advisor for Lincoln Liquidity’s DD Token and will shed light on ICOs, what you should look out for, and things to consider before agreeing to advise an ICO.
1. Ensure that the idea or product is sound before advising
There are many examples where ICOs took on advisors and used them as a cover for bad ideas. Advisors should make sure that the reasons for having an ICO and launching a token are valid and necessary.
Inchain, for example, was an insurance-based bonds investment platform raised 57.972 BTC during their ICO. They were unable to raise their minimum funding target and were forced to refund monies to all ICO participants and cancel the ICO. According to Frederick Resse of BTC Market Journal:
“The proposal behind the ICO showed significant problems, including no proof-of-concept for an unfamiliar concept, no investor protections, and limited management experience. Inchain listed two business advisors on its whitepaper: the founder of an investment solutions provider and the head of the finance team for an insurance firm. There was nothing to suggest that Inchain or its team had enough knowledge to successfully manage the ICO or the resulting business. This oversight did not escape the notice of the ICO community.”
If you are not onboard with the product or if the reasons for creating a token raise some red flags, do not agree to advise that particular ICO project. It may backfire and damage your reputation as an industry expert.
2. Stay within your comfort zone
Are you a super technical developer but know nothing about finance?
Simple. Do not advise as an expert on finance.
Anything outside of your comfort zone may prove disastrous both for you as an advisor, and the business conducting the ICO. It is crucial to maintain open lines of communication and clearly outline what it is you are good at, and how you bring that value to the ICO. If you feel that you are not a right fit, it is important to be upfront and say so, otherwise you will find yourself knee-deep in trouble when expectations are not met.
Ensure that you understand what is expected of you, and remain as an active participant. It is important to lend more than your name to a project. Showcase what makes you an expert — be productive and contribute in a meaningful way.
3. Know what Legal Liabilities may arise
No one outside of the legal profession actively enjoys reading legalese. Unfortunately, (especially in the fintech and world of technology), these documents are a necessary evil. It is important to understand what Advisors are liable for when they sign on to advise an ICO. In the United States, for example, according to the Securities and Exchange Commission (SEC) “Participants may be liable”.
The SEC defines the term participants as follows:
“…Directors, PR firms, officers, and formally unaffiliated persons who are directly involved with selling, issuing, or transferring shares, soliciting investors, or issuing investment materials for a particular unregistered security may be subject to the requirements of federal securities laws, and potentially held liable for violations of these laws in an SEC enforcement action.”
Advisors should be aware of their legal jurisdiction’s regulations regarding ICOs, and (especially for Investors/Advisors) should be aware of any legal liabilities that may arise.
4. Avoid potential Conflict of Interests
This one goes in tandem with №3. After reading the legalese, and understanding what the legal liabilities are, Advisors should ensure that all interests are adequately disclosed to avoid any potential Conflict of Interest.
Transparency and openness ensures that you and your interests are protected.
5. Ensure Payments/Honorariums/Shares in ICO are clearly laid out
In exchange for valuable insight, time, and effort, as an Advisor, it’s important to understand what will be given to you in return. Unless explicitly stated, all expectations regarding payment, or lack thereof should be clearly outlined in the Advisor Agreement.
Generally, Advisors should put in a minimum of 2 hours/week for a 1–2% stake of the ICO. If you are putting in more time, or more is required of you than originally anticipated, a re-evaluation of terms would is definitely in order.
Advising for an ICO can be a rewarding experience and can provide exposure on innovative ICO projects in the blockchain space. It is important to take necessary steps to protect yourself from legal liabilities and problems by managing expectations clearly. Advising should be a mutually beneficial experience that can teach you a lot, provided that you follow these tips.
Have you advised on an ICO and would like to add to the list? Let us know in the comments below!