Priming the ICO Pump; Don’t Get Sucked In

books-library-knowledge-tunnel-50548.jpegIf you’ve been under a rock for the last year or so, you might not know that “initial coin offerings” or ICOs are the hottest thing in the financial market today. As if the fact that the overwhelming majority of ICOs aren’t regulated in any substantive way didn’t make them a risky enough investment, it seems fraudsters are dusting off the old “pump-and-dump” scheme made famous in the 80’s and 90’s and giving it new life in the ICO industry.

Some Background:

In case you’re not familiar with what exactly an ICO is, an ICO involves a company selling some form of “cryptocurrency” (i.e. “coins” or “tokens”), or right to receive it in the future, to the public in exchange for cash or other existing and established “coins” such as Bitcoin. What is often the case is that the selling company typically has no actual technology in place to facilitate the use of the cryptocurrency it is selling prior to selling it to the public; only an idea (in the form of a “whitepaper”) as to how the technology will work, and what it is intended to do, in the future when it is finished (if it even has that). The selling company typically claims that it will use the offering proceeds to fund the actual technology creation. To put this in more layman’s terms, a typical ICO is like a company selling you the right to receive a jetpack in the future and claiming that it will use the money from all the jetpack presales to actually figure out how to make jetpacks.  To make matters worse, ICO “whitepapers” used to be highly technical documents that actually spelled out how the selling company intended to create the technology and meet its business goals. Like a detailed business plan translated into IT speak. Today there are companies like Fiverr that sell form ICO whitepapers for as little as $30 and investors are often completely in the dark.

You would think the above risks alone would be sufficient to dissuade the majority of sophisticated investors … but you’d be wrong. ICOs have raised more than $3 Billion (yes, with a “B”) in investment in 2017 alone, with several ICOs raising hundreds of millions of dollars in the span of only a few days. What’s more is we aren’t talking about everyday-Joe investors (what some people might refer to as “dumb money”), you simply wouldn’t get to $3 Billion with that level of investment. In fact the majority of the money funneling in to these ICOs is coming from individuals and companies that are supposed to be highly sophisticated, but why?

Fuelled by the meteoric rise of the price of Bitcoins, the endless stream of “Bitcoin millionaire” stories, and other news/social media, speculators are literally crawling over each other just for the opportunity to throw money at any new ICO that comes along just in case it may be the next Bitcoin. Now this is just my own opinion, and I may be wrong, but I have to believe that most of these investors don’t actually understand what they are investing in at all. They simply hear words like cryptocurrency, blockchain and Bitcoin and hand over their wallets. Don’t believe me? Let’s do an experiment. If you know anything about the Bitcoin space I am sure you have heard of Mt. Gox, one of the original and largest Bitcoin exchanges in the world which, at its peak, handled over 70% of all Bitcoin transactions worldwide. What if I told you that you could invest in a proposed $245M ICO right now that is intended to revive the exchange and return it to its former glory, would you invest? For those that said yes (and you know who you are), skip down to the conclusion section to see how your investment would turn out.

Before I go too far down the cynical road let me backtrack a bit by saying that an ICO is actually a phenomenal method of raising capital for a project where the use of a cryptocurrency actually serves an industry need or otherwise helps ease transactions. However, the majority of the now more than 1,200 cryptocurrencies currently in circulation (according to, serve no real need, and frankly never will. It’s like a family playing Monopoly except everyone decides to bring their own form of money to play with just because they feel like it.

With the intense fervor currently surrounding the ICO market a swarm of “blockchain” startups have entered the scene. Many of these companies clearly don’t have the experience or technical capability to actually create the technology they are selling and will end up leaving investors with a worthless cryptocurrency. Even worse, there is a growing number of ICO companies popping up whose sole intention is to grab as much cash as possible from unwary investors and simply disappearing. While some are blatant about it like Confido, others are reviving the more subtle “pump-and-dump” scheme made famous in the 80s/90s by traders like the convicted Jordan Belfort (a/k/a the “Wolf of Wall Street” played by Leonardo DiCaprio in the recent movie of the same name).

How Does a “Pump-and-Dump” Scam Work?

Ipexels-photo-978711.jpegn its simplest form, a “pump-and-dump” ICO scheme involves a person or company (let’s call them, “Mister X”) artificially causing the value of a particular cryptocurrency/stock to rise quickly at which point Mister X sells off the cryptocurrency/stock they own at the higher price; hence the term “pump-and-dump.” As the price of the subject cryptocurrency/stock was only artificially raised, once Mister X stops actively pumping up the price and dumps what they own the price tends to fall dramatically leaving later investors with heavy losses.

Without going too far down a rabbit hole, in the ICO context this scam currently comes in two flavors. The first relates to the pumping up of stock prices of (particularly those of so-called “penny stocks”) by making some form of announcement that the subject company is planning on, or otherwise considering, doing an ICO or engaging in some other cryptocurrency/blockchain related activity (even investing in cryptocurrency). As you might imagine, unwary investors hear about a company getting involved in cryptocurrency/blockchain (and not by accident as I will discuss later) and they rush to buy the stock. The stock price goes through the roof, Mister X sells off his shares, the subject company never actually engages in any cryptocurrency/blockchain activity and the stock tanks leaving investors in the lurch. This is an almost identical version of the scheme made famous by traders like Belfort and is a big no-no under current securities laws (because stocks traded in public markets are specifically regulated by securities laws). In fact the SEC recently suspended the trading of shares by four companies that had been talking up ICO-related activities (First Bitcoin Capital Corp.CIAO GroupStrategic Global, and Sunshine Capital).

The other flavor of this scam is a bit different and much more dangerous. Under this version a new “blockchain” startup gets a big name celebrity or other social media influencer to endorse the new form of cryptocurrency the startup is creating. The endorser then uses social media etc. to attract investors. The new currency is listed on some readily accessibly exchange such as the Las Vegas-based exchange Bittrex or the Russian exchange Yobit and seduced investors start buying it up, pushing its value higher. As the value increases, the excitement surrounding it increases and more investors flock to the new currency. At some point the company insiders determine that the price is high enough and cash out their stash of the company’s new cryptocurrency at the inflated value. This includes the enlisted celebrity/influencer who is often paid, in whole or in part, in the new cryptocurrency. When the smoke clears, the company insiders and the celebrity/influencer make millions while the other investors are left holding a cryptocurrency with no real value which is on a downward spiral.


Recently, celebrities including Jamie Foxx,  Floyd Mayweather, Jr., Paris Hilton, DJ Kalid and even William Shatner (among others), have publicly endorsed certain ICOs. How exactly having a celebrity helps sell an ICO I really can’t tell you, because if you are taking investment advice from Paris Hilton (who frankly couldn’t spell ICO without a cue card) you probably deserve to lose your money.

if you are taking investment advice from Paris Hilton you probably deserve to lose your money #ICO


That being said, artificially pumping up the excitement surrounding an ICO absolutely works. Many of these ICOs raise millions (and sometimes tens of millions) in mere days/weeks. More importantly, unlike in the first example above which is clearly illegal, this form of market manipulation is currently legal. How is this possible you may ask? The answer is because the overwhelming majority of cryptocurrency exchanges and markets currently remain almost completely unregulated; falling instead into a veritable grey area between regulated finance and securities. While the SEC has recently dipped its toe into offering regulatory guidance with respect to ICOs and cryptocurrency sales (including issuing certain investor warnings as discussed below), the industry still remains largely unregulated with little to no recourse for duped investors. In fact, Belfort himself has been recently quoted as saying that most ICOs are “a huge gigantic scam that’s going to blow up in so many people’s faces” and that “it’s far worse than anything I was ever doing.”

The mechanics of actually how these companies go about manipulating the market and influencing investors is well beyond the scope of this post. That being said, as a final note on this subject and a prime example of how unregulated these markets are, its important to note that those involved in this form of manipulation often make little effort to hide their activities. In fact there are multiple postings and social groups (e.g. the PumpKing Community, Crypto4Pumps and We Pump) who provide advice and instruction for scammers on how to manipulate the price of their respective cryptocurrency and how to attract celebrities/influencers who will help them do it.

Some Recent SEC Guidance

The SEC has recently taken several affirmative steps toward bringing the offering and sale of crytpocurrencies under its regulatory blanket. The most affirmative of such actions to date was the SEC’s landmark ruling that the offering and sale of blockchain based tokens CAN be deemed securities (and thus regulated by applicable securities laws) under the right circumstances; particularly if they are purchased with an “an expectation of profits.” This put the ICO industry in a tizzy, sending would be ICO offerors and investors running to securities attorneys (like me).


More recently, the SEC’s Office of Investor Education and Advocacy issued an “Investor Alert” concerning both “pump-and-dump” and other market manipulations by publicly traded companies. In this notice the SEC made it clear that the first flavor of ICO “pump-and-dump” schemes described above is clearly considered fraud:

“Fraudsters often try to use the lure of new and emerging technologies to convince potential victims to invest their money in scams.  These frauds include “pump-and-dump” and market manipulation schemes involving publicly traded companies that claim to provide exposure to these new technologies.”

That being said, in a subsequent “Investor Alert” the SEC’s Office of Investor Education and Advocacy was considerably lighter handed when discussing the use of celebrity endorsements in connection with the second flavor of ICO “pump-and-dump” schemes described above. Rather than classifying celebrity endorsements as an outright form of market manipulation, the alert only provided that: “It is never a good idea to make an investment decision just because someone famous says a product or service is a good investment.” A related SEC statement took it a step further, basically stating that a celebrity endorsement would be permissible as long as the “nature, scope, and amount of compensation received in exchange for the promotion” is disclosed; but not offering any guidance as to how (or more importantly how blatantly) the same needs to be disclosed to potential investors.

There are a few other related SEC investors alerts/statements to date but we are well short of real regulatory guidance with respect to the cryptocurrency/ICO industry. That being said, there is a clear movement in the industry toward creating securities law compliant ICOs and exchanges (such as Overstock’s new tZERO exchange). There is also some expectation that the SEC will put out more formal/substantive guidance concerning securities law compliant ICOs in 2018.

Tips for Investors:

The “Investor Alert” concerning “pump-and-dump” schemes discussed above included certain specific investor tips for avoiding the first flavor of ICO “pump-and-dump” schemes described above. To better account for both flavors of the scheme, here is my paraphrasing of the pertinent tips:

  • Always thoroughly research a company before buying its stock/cryptocurrency; including: (a) the company’s finances, organization and business prospects; (b) the experience and technical capabilities of the company’s management team; and (c) the company’s plan (including its “whitepaper”) for actually creating the technology (e. blockchain-based software, etc.) to facilitate the use of the cryptocurrency being sold.
  • Investors should do their own research and be aware that information from online blogs, social networking sites, celebrity endorsers and even a company’s own website may be inaccurate and potentially intentionally misleading.
  • Be especially cautious of: (a) publically traded companies touting an ICO or other cryptocurrency/blockchain related activity with no prior or demonstrable experience in the space; and (b) companies raising money which describe its ICO/cryptocurrency in vague, or nonsensical terms, using undefined technical or legal jargon and/or without a clear plan as to how to accomplish its long-term business objectives.
  • Look out for: (a) increases in stock/cryptocurrency price or trading volume happening at the same time as a large promotional activity; (b) press releases or promotional activities announcing events that ultimately do not happen (g., multiple announcements of preliminary deals or agreements; announcements of deals with unnamed partners; announcements using hyperbolic language); and (c) companies which have no real business operations (few assets, or minimal gross revenues) or operational experience.

In addition to the above, I would personally add the following tips:

  • For companies performing an ICO, thoroughly research what the proposed cryptocurrency is intended to do; in particular what industry need/want the proposed cryptocurrency is intended to satisfy. A cryptocurrency (like any other new product) which does not fulfill a specific need or desire is highly unlikely to be successful in the long run.
  • Thoroughly research the company’s management team (in particular, their Chief Technical Officer, or the like) to determine their existing and prior experience in the cryptocurrency/blockchain space. Most notably, determine whether they have a clear plan for creating the intended blockchain based technology and whether they have the technical expertise to make it a reality.
  • Look for ICOs that are specifically being conducted in compliance with applicable securities laws (like those proposed to be offered through Overstock’s new tZERO exchange). An ICO which is conducted as a security sale in compliance with applicable securities laws would specifically prohibit blatant market manipulation efforts like those described above and would provide the investor with certain rights in terms of redress in the event the company goes south. That being said, be wary of any company that touts an “SEC compliant” ICO or the like without describing in detail how it is attempting to comply with such laws. Technically there is currently no bright line form of “SEC compliant” ICO and they are being reviewed on a case-by-case basis.


boot-cowgirl-horse-tack-51130.jpegThe ICO industry is still very much the wild west and is wrought with landmines for unwary investors. In fact, as discussed above, many ICOs are outright scams specifically intended to bilk investors out of as much money as possible before pulling out and leaving the investors to feel the burn of the inevitable death drop in the value of their investment. All of this being said, there are some legitimate ICOs out there and, for those investors lucky enough to find these four leaf clovers, the rewards can be great. Investors just need to do their homework and not be mesmerized by terms like cryptocurrency, Bitcoin etc. Like anything else, you need to know exactly what your investing in and don’t let yourself be distracted by unfounded company claims or random endorsers (I mean Paris Hilton, seriously?). If not, you might as well take the money you were going to invest and buy Powerball tickets as you’d be just as likely to hit the jackpot.

Oh, and for those of you who would invest in the Mt. Gox ICO discussed above on name recognition alone, you probably should have read the fine print. The company owes over $175M to creditors/claimants and the majority of funds raised would go to pay off such debts. Put another way, the majority of your money would go to pay off existing debt just to bring the company back to even with little to no prospect or plan for actual future success. Probably should have done more homework on the plan before thinking about investing huh?

About Anthony Zeoli

Anthony Zeoli is an experienced transactional attorney with a national practice. Specializing in the areas of securities, commercial finance, real estate and general corporate law, his clients range from individuals and small privately held businesses to multi-million dollar entities. Mr. Zeoli is also an industry-recognized crowdfunding, peer-to-peer (P2P) lending and JOBS Act expert and is currently an active board member and Secretary of the CfPA (Crowdfunding Professional Association) and an active member of CFIRA (Crowdfund Intermediary Regulatory Advocates). Most recently he drafted Illinois House Bill 3420, a bill which provides for an intrastate crowdfunding exemption in Illinois and which was unanimously approved by the Illinois’ house and Senate. Anthony is also currently actively involved with the entrepreneurship program at the University of Illinois at Chicago as both a mentor and a student advisor and is an active advisory board member of the New York Distance Learning Association (NYDLA).
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