In order not to fall victim of swindlers, it is necessary to understand the concept of distribution of funds raised through initial coin offering (ICO). This knowledge will serve as a guide for investors and will shed more light on how their means are spent. In this article, we will talk about why it is important and what is the correct way to distribute investments.
After a hard cap or a soft cap is reached, or an ICO is complete, the team starts distributing the raised funds. The distribution depends on how the team visions/views the approximate costs of the project’s stages and intricacies. Traditionally, the biggest part of the assets goes for creating the product and the rest goes for settling legal and administrative matters. The information on how the project is going to use the investments is specified in the white paper section. It allows an investor to learn how the funds will be distributed and how much will be earned as a result.
Why is it important to understand how funds are distributed?
In 2017, more than 80% of the projects turned out to be a scam. The majority had no strategy of funds distribution specified in the technical documentation. Since it is an indication that the project was designed as a fraudulent one and the team did not even try to specify the stages of financing, the investors who contributed money for those projects could have avoided the fate had they paid attention to this fact.
Even the projects that were engaged in real production but did not plan a strategy of financing its stages distributed the money in such a way, that they were not able to launch the project and, as a result, inflicted losses to the investors. Thus, a competent strategy of the means distribution is what an investor should pay attention to while studying the white paper.
Correct funds distribution
It is important to understand that the collection and distribution of funds is the core of a project, the place where the interests of the team and the investor overlap. Therefore, the matter should be specified accurately and clearly in the documentation.
If the section is not present, or if it is written in a vague or confusing manner, it is an indication that the money should be held back and the investor should contact the organizers of the ICO to receive the necessary explanations about the project financing and the profits.
Moreover, it would be useful to collect data on those who invested into the project on its early stages and to make sure that the development of the company is not built on the tokensale only.
The investor should be also suspicious if:
• the biggest part of the means goes to organizating bounty programs;
• the means goes to the issues that are not related to the project;
• the means goes to the needs of the founders.
To sum it up
To sum up all of the above, it should be noted that understanding all the subtleties and nuances of the project’s financing demands understanding the market, interacting with the team and, in some cases, consulting an independent expert. At the same time, it gives you a clear understanding of how the assets will work for creating the product and eventually bring you the profit.