When it comes to scamming people by using financial instruments, Jordan Belfort is an expert. Back in the 1990s, Belfort ran a $200 million penny stock pump-and-dump scheme. He is now warning people about the dangers of Initial Coin Offerings, the hot, loosely regulated cryptocurrency fundraising tool.

Belfort, who went to prison after pleading guilty to a securities fraud and money laundering in 1999, told the Financial Times that he sees parallels between ICOs and the popular fundraising schemes of the 1980s called "blind pools." In blind pools, a limited partnership raises money by using a well-known investor's name without indicating how the money would be spent. These investment vehicles provided little safeguards to protect investors and many fraudulent pools were dissolved without making investments. (The partners, however, collected handsome fees.)

An ICO is a fundraising mechanism for startups, especially companies that just started and have no product or operating history. These companies are unlikely to get venture capital funding, but they can easily create their own coin or token by using cryptocurrency platforms like Ethereum. Once a company creates its own digital token, it can host a crowdsale to sell these tokens in exchange for EthereumBitcoin, and fiat currency. Once the sale is over, the company's coin can be traded on cryptocurrency exchanges and could theoretically increase in value if there is enough demand around a certain project.

Companies host ICOs that offer different types of tokens that have different value propositions or uses. Some ICOs sell "utility tokens," which users need to buy if they want to use the company's app, network, platform, or protocol. If a company sells a utility token, the U.S. Security and Exchange Commission says it's not a security and does not need to adhere to SEC securities regulations. It's more like buying gas--you can't use a car without gas in the tank.

But other companies holding ICOs sell tokens that are meant to increase in value, like a stock. According to the SEC, these tokens are considered a security and the companies selling the tokens need to register with the SEC and comply with all securities regulations. 

According to CoinSchedule.com, which tracks ICOs, there have been 202 ICOs in 2017 that have raised a total of $3.2 billion. Most of the ICOs were for projects that do not have an existing product, or operating history. Most of the companies launch a website with a white paper explaining what they plan to build, says Scott Robinson, the co-founder of Plug and Play's bitcoin startup accelerator.

Most ICOs hold pre-sales, during which early investors can buy tokens at a steep discount and sell for a tidy profit when the general public starts buying the coins. Belfort said he doesn't trust these operators.

"Promoters [of ICOs] are perpetuating a massive scam of the highest order on everyone," Befort told FT. "Probably over 85 percent of people out there don't have bad intentions, but the problem is, if five or 10 percent are trying to scam you it's a f**king disaster."

In July, the SEC warned investors about "improper" ICO schemes and issued rules on how startups can decide whether or not they are selling securities or utility tokens. 

In September, China's central bank banned ICO funding. Regulators in the U.K. recently issued a warning that investors should be prepared for the value of tokens purchased in ICOs to evaporate.

Fred Wilson, tech investor and founder of Union Square Ventures, wrote on his blog in June that he is "bullish" on cryptocurrency, but he says the space is very risky. His general advice for investors is simple--"buyer beware."

"When people are afraid, be greedy. And when people are greedy, be afraid. We are much closer to the latter scenario in crypto right now and while I am not afraid for my investments and USV's investments in this sector, I am afraid for the sector and those who are being the most greedy right now." Wilson wrote. "I am cautioning our portfolio companies to tread carefully and we are treading carefully. And I would advise all of you to do the same."

One of the recent ICO flops involved Slock.It, a German company that launched an ICO to fund its project called The Decentralized Autonomous Organization (DAO). The DAO was supposed to be an autonomous organization that made investments and distributed profits to DAO coin holders. It raised $150 million, but hackers stole $50 million after exploiting a vulnerability. The SEC investigated the company, stating The DAO sold securities without registering with the SEC but decided not to bring enforcement actions against the company.

Paul Vigna, a reporter at the Wall Street Journal who covers cryptocurrency, wrote that ICOs are risky because many teams are untested and the companies are "opaque structures" that provide "little transparency" into how the money being raised will be used. Tezos, Vigna reports, held an ICO that raised $232 million on the premise that it will make software to improve blockchain technology. But after management in-fighting, investors cannot re-sell their tokens until the company resolves its issue. 

Robinson says ICOs are like early bitcoin startups back in 2011--many of the companies were either risky, unsustainable ideas, scams, or run by pioneers who move fast and break things.

"We are still so early for the crypto space. Look other disruptive companies like Airbnb and Uber--they are still illegal in some cities," says Robinson. 

Robinson says most people invest in ICOs because of the chance to win big--bitcoin's price went from a few cents each bitcoin to $5,734 per bitcoin in four years.

Robinson agrees that the majority of ICOs are scams, but, he says there are boxes you can check if you want to invest in a legitimate ICO. First, what have the founders done before this company? If they are newbies looking to raise $100 million, or you cannot verify their identity, don't invest. Second, do they have a product or platform that is being used or being tested? If it's a pie-in-the-sky jargon-packed pitch about a decentralized trustless marketplace based on blockchain technologies, you should pass. Thirdly, is the company registered with the SEC and do they adhere to anti-money laundering laws, and will the pre-sale investors be held to a 12-month lockup date before they can re-sell the token? If so, that is promising.

Robinson says the gray market of ICOs is very much a "wild west" and investors and entrepreneurs should look at ICOs as a risky wager. 

"Many of these projects are speculations for big, disruptive [technological] changes," says Robinson. "Personally, you should look at each investment on these like you're putting $500 into three different slot machines."