According to Emerson Taymor, Founding Partner of Philopshie, the ICO, or Initial Coin Offering, is “fundamentally changing the startup landscape because of the liquidity they provide to team members and investors.”

An ICO consists of a company offering for sale, for the first time, a unique cryptocurrency of its own creation. These digital tokens can serve multiple functions, and those functions often directly determine the token value. ICOs allow startups and established companies alike the ability to raise funds for disruptive new technologies and services. It also gives consumers a unique financial opportunity and often a new method of interactivity with a company’s product or service.

Cryptocurrency offers a global financial alternative and can be a liberating force for the developing world. However, like any emerging technology, there will always be those who manipulate the public’s perception of it for their own illicit purposes, usually profit. Many articles are published today about ICOs and cryptocurrency revolving around people who use token sales to perpetrate pyramid schemes and other nefarious scams on unsuspecting consumers.

The first step when considering such an investment is distinguishing between a legitimate ICO and the hollow money-grabs that may also be unlawful attempts to defraud you.

How can you tell the difference? It’s far easier than you might think.

Know Your Tokens

There are three types of popular tokens – securities, equity, and utility.

A “security” refers to any kind of tradable asset. Securities tokens can range from coins redeemable for precious metals to tokens backed by real estate. In the United States, these token sales and investments are subject to SEC securities regulations.

Equity tokens offer holders an ownership stake in the company issuing that token.

Utility tokens provide holders with access to a product or service. They are integrated in some way into whatever the company issuing that token sells.

Knowing which type of token is right for you is a big part of investing in the space. However, if a prospective token does NOT fall under one of these three categories, you should probably avoid it.

Know Your Token’s Utility

Many thought leaders in the space believe that utility is the future of cryptocurrency. An increasingly important question to ask when examining an ICO is, “How does this company integrate, or plan to integrate their token into their product or service?”

The more utility a coin has, the more stability it has. That stability relates directly to the value of the token and how that value sustains and even increases over time.

A lack of utility can also be a warning sign. If a prospective token doesn’t serve any functional purpose, or doesn’t seem to be backed by a stable product or service, you might want to avoid that coin in favor of one that does.

Know Who’s Behind the ICO

Every white paper and ICO website should list, at the very least, the core team of founders and developers behind the company creating the token. Reading a LinkedIn profile or performing a simple “Google” search will give you ample information on the names behind the ICO. You want these people to be known personalities in the field of cryptocurrency and blockchain, technology in general, or their company’s specific industry. If an ICO white paper lists names you can’t connect to an established resume, you probably shouldn’t trust those names with your investment.

Know Your Local Regulations

The rules governing the sale and purchase of cryptocurrencies change from region to region, and in many cases remain under constant review. It’s important to be aware of any local regulations that will affect the offering of a coin and thus your ability to purchase and hold it. Make sure any digital token you’re considering is meeting the relevant guidelines of your area.

You will find that following these simple vetting steps will quickly weed out the obvious scams from the legitimate, quality ICOs offering a potentially valuable investment opportunity.