The Initial Coin Offering (ICO) market is growing at an alarming rate. In the first six months of 2018, startups managed to raise over $11 billion, representing tenfold growth over the year. However, despite the growth, the ICO market remains largely unregulated. In turn, this offers some ill-intentioned people the opportunity to scam millions of dollars out of investors’ pockets. One startup that might be one of the largest ICO scams ever is Envion. Chances are you haven’t heard about Envion. Nevertheless, Envion has been creating a lot of chatter amongst the crypto communities.
What is Envion?
Envion is a Swiss-registered and Berlin-based startup that claimed to produce solar-powered cryptocurrency mining equipment. Earlier this year, the company reportedly raised $100 million in an ICO. At first, Envion seemed legit. According to an article in The New York Times, Envion even told investors that they were working on deals with IBM and other major companies.
Therefore, on the surface, it looked like Envion was a solid investment opportunity. However, later it turned out that these alleged deals had not taken place. Envion issued 100 million tokens that were sold at $1 apiece. According to the Handelsblatt, Envion promised investors a return of 161%. Currently, one EVN token costs just around 7.8 cents and the company is no longer a functioning business.
What Went Wrong?
Envion is in the midst of an ongoing battle between the founders and the CEO Matthias Woestmann. A statement by Woestmann noted that, in addition to the 100 million EVN tokens, another 40 million tokens were generated and sold without the knowledge of the board. However, the founders later dismissed the allegations and rebutted that it was Woestmann who illegally profited from the ICO. The founders of Envion hold their stake via Trado GmbH.
Trado claimed that the capital increase was done by Woestmann and that he transferred the ownership of additional shares to Sycamore GmbH, a company owned by Thomas van Aubel and Jutta Freifrau von Falkenhausen, who are friends of Woestmann. Woestmann issued additional shares to dilute the founders’ stake from 81% to 31%. Trado believed this was an attempt by Woestmann to take over the company and even sell it.
In June, a court in Berlin ruled in favor of Trado and issued an injunction against Woestmann’s Quadrat Capital GmbH and Sycamore GmbH. Trado’s statement added that Woestmann, van Aubel, and von Falkenhausen could receive a 6-month prison term for each violation.
The Envion Saga is Far from Over
Last month, the Swiss Financial Market Supervisory Authority (FINMA) announced that they had launched enforcement proceedings against Envion AG. FINMA claims that Envion had breached financial market law by accepting public deposits in connection with its ICO.
Meanwhile, Envion has recently found itself facing another lawsuit. According to the Handelsblatt, a group of investors has filed a lawsuit seeking damages for false information. The lawsuit claims that Envion misled investors with some of the information that it disclosed to investors. In addition, Envion sold tokens to German investors, though its prospectus was not reviewed by the financial authorities.
Envion is Not the First or Last ICO Scam
Technically, Envion is not a scam, at least not yet. And it isn’t the only legally grey area of its kind. Another exchange that traders have accused of stealing funds was recently broken into and vandalized.
The founders claim that they are ready to build their business, although it is uncertain whether they will have any money left after the lawsuits and penalties. However, the end result is that around 30,000 people saw their investments disappear over the course of several months. If investors don’t receive any money and Envion goes bust, it might be one of the largest ICO scams. Though, it is certainly not the only ICO scam of this caliber. Earlier this year, a Vietnamese company reportedly got away with $660 million in ICO funds.
Unfortunately, Envion is just one example among hundreds of similar situations involving ICOs. In fact, a study conducted by the Satis Group revealed that 78% of ICOs in 2017 were scams. Earlier this year, the Wall Street Journal conducted an analysis of 1,450 ICOs and discovered 271 with red flags. Potential red flags are plagiarized documents, promises of returns and fake executive teams. These ICOs raised around $1.0 billion.
Regulators Need to Step in
Unfortunately, the current unregulated environment of the ICO market makes it easy for scams to continue. What started as a great way for blockchain based companies to raise money for their projects, quickly turned into a lot of get-rich-quick schemes. This, in turn, may make investors apprehensive of ICOs in general. As a result, companies with a lot of potential may not be able to implement their ideas and people will miss out on real investment opportunities.
Is the only way for ICOs to regain their credibility is for financial regulators to take action? Currently, authorities intervene post-factum in cases that involve many people and/or large amounts of money. However, regulations would keep companies accountable by requiring the disclosure of accurate information.