Imagine you want to open a bar. You've found a location. You've planned the design. You know exactly how it's going to look and feel, and you know what kind of food and cocktails you're going to serve.

There's just one problem...

You don't have the $100,000 you need to rent the place, renovate it, stock it and staff it the way you want.

So you hit on an idea. Your bar will produce its own branded tequila. But it will only make 1,000 bottles, and customers won't be able to buy them. They can only acquire them using special tokens that you'll release gradually over the following months. If demand for those bottles is high enough and if buyers believe that demand will continue to grow, pushing up the price of their tequila tokens in the future, they'll sell for large sums and you'll raise enough money to open the bar.

That's the principle behind an ICO, an Initial Coin Offering of cryptocurrency. In the same way that an IPO offers the public the opportunity to buy shares in a company, an ICO gives customers the right to buy a product that's in limited supply. They can sell that right for a higher price if they want to. Supported by blockchain technology, a way of guaranteeing the authenticity of those tokens, it's a whole new way for businesses to raise money. According to ICO Alert, it's already been used to raise some $2 billion.

But it's also risky. IPOs are regulated. Companies have to reveal all sorts of information about themselves before they can go public. That allows investors to make reasonable assessments about their value, and they may get to vote at shareholder meetings. Venture capitalists will demand a seat on the board and a range of other rights before they're willing to put money in a firm. People who invest in an ICO walk in with much less knowledge and walk away with much fewer rights. Regulators are starting to look more closely at ICOs, and in China, they've been banned, at least temporarily until such regulation is in place.

Where there's a risk though, there's also opportunity. Assessing an ICO isn't easy but there are a few factors that you can examine.

First, you can assess the business in the same way that you'd examine any company. Is the team experienced and capable? Is the product good? Does it have a market? If the company won't be able to create the product, and if the product isn't wanted, there's little point in investing.

You'd then need to look specifically at the cryptosale. This is a bit more complex--and a lot newer. You'd need to examine which blockchain technology is underpinning the sale, how many tokens are being distributed, and how they're secured. You'd also need to examine the legal and regulatory stuff that surrounds the sale. Is the company obeying local laws and regulations? Where are the terms and conditions, and do they look fair? None of that is straightforward, and it's all pretty new.

But it's also exciting and it's a field packed with new opportunities. Be careful before you invest in an ICO. Make sure you do your homework, and know what you're buying.

Published on: Sep 19, 2017
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.