CCE Initial Coin Offerings (ICOs) 4 — Questions and Answers
Question 1: What is an 'ICO exit scam' (also known as a 'rug pull' in its ICO form)?
- When an ICO project's founders abandon the project and disappear with investor funds after raising money (Correct answer)
- When an ICO fails to reach its soft cap and refunds investors
- When early investors sell all their tokens immediately after exchange listing
- When an ICO's smart contract is hacked and funds are stolen by external attackers
Correct answer: When an ICO project's founders abandon the project and disappear with investor funds after raising money
An exit scam occurs when ICO founders collect investor funds and then deliberately abandon the project, taking the raised capital with them.
Question 2: What does 'lock-up period' refer to in the context of ICO tokens distributed to early investors?
- The time period during which the ICO smart contract is audited
- A restriction preventing early investors from selling their tokens on exchanges for a defined period after listing (Correct answer)
- The duration of the public token sale event
- The period before the project's mainnet launches
Correct answer: A restriction preventing early investors from selling their tokens on exchanges for a defined period after listing
Lock-up periods prevent early investors from immediately selling their discounted tokens upon exchange listing, protecting market price from sudden large sell-offs.
Question 3: Which of the following best describes 'pump and dump' manipulation in ICO markets?
- Artificially inflating a token's price through coordinated buying and false promotion, then selling before the price crashes (Correct answer)
- A legitimate strategy of buying tokens during the ICO and selling at a premium after listing
- Increasing token utility by adding new features to the platform after the ICO
- Moving tokens between wallets to demonstrate transaction volume to potential investors
Correct answer: Artificially inflating a token's price through coordinated buying and false promotion, then selling before the price crashes
Pump and dump schemes involve coordinated groups artificially inflating token prices through hype, then mass-selling to profit at the expense of other investors.
Question 4: What is the role of a 'smart contract audit' before an ICO launches?
- It verifies the project's business model viability and market potential
- A security review by independent experts to identify vulnerabilities in the ICO's smart contract code (Correct answer)
- A regulatory review conducted by government authorities to approve the token sale
- An accounting audit of the founding team's previous financial records
Correct answer: A security review by independent experts to identify vulnerabilities in the ICO's smart contract code
Smart contract audits are security assessments by specialized firms that examine code for bugs, vulnerabilities, and exploits before investor funds are committed.
Question 5: What distinguishes an IEO (Initial Exchange Offering) from a traditional ICO?
- IEOs are always conducted on the Ethereum blockchain while ICOs can use any blockchain
- In an IEO, a cryptocurrency exchange conducts the token sale on behalf of the project, providing vetting and instant liquidity (Correct answer)
- IEOs are regulated by the SEC while ICOs operate in an unregulated space
- IEOs sell equity in the company while ICOs sell only utility tokens
Correct answer: In an IEO, a cryptocurrency exchange conducts the token sale on behalf of the project, providing vetting and instant liquidity
IEOs are conducted through an exchange's launchpad platform, which vets projects and provides immediate trading after the sale, unlike self-managed ICOs.
Question 6: What is 'whale manipulation' in ICO investing contexts?
- When large token holders use their significant positions to artificially influence a token's market price (Correct answer)
- When ICO projects target institutional investors exclusively to raise funds
- When exchanges charge higher fees to large-volume traders
- When project founders hold more than 50% of total token supply
Correct answer: When large token holders use their significant positions to artificially influence a token's market price
Whales are holders of very large token quantities who can move markets by placing or canceling large buy/sell orders to manipulate price in their favor.
Question 7: Under the Howey Test applied to ICOs, which element is most commonly argued to be absent when projects claim their token is a utility, not a security?
- An investment of money
- A common enterprise
- An expectation of profits (Correct answer)
- Profits derived from the efforts of others
Correct answer: An expectation of profits
Projects often argue their tokens provide immediate utility rather than creating an expectation of profit, trying to negate the third prong of the Howey Test.
CCE Initial Coin Offerings (ICOs) 4
What is an 'ICO exit scam' (also known as a 'rug pull' in its ICO form)?