Pre ICO Due Diligence Framework by DD

Framework for
In-house Due Diligence
on Pre-ICO Startup
© Denis Dovgopoliy
https://www.linkedin.com/in/dennydo/

Introduction
We experience the ICO boom, and 80% of all projects that launch ICO look like
scam. The rest projects still play a risky game, which becomes even more
complicated because of regulatory authorities (IRS, SEC, etc.) and KYC/AML.
The framework is set to run a Due Diligence process for projects that launch
ICO. Since the procedure requires a lot of resources it makes sense to run the
Due Diligence for projects, where you are going to invest above $50,000
getting no more than 5% of the whole token emission during ICO. If you invest
less you should be aware what game you play.

Introduction
The framework focuses on the Due Diligence procedure for projects that emit
cryptocurrency to cover project needs (utility coins). It is assumed that the
currency has no value outside of the services the company provides. Investing
in the currency becomes attractive due to the service value.
Therefore we distinguish two types of investors:
- Investors who expect the price of the cryptocurrency will increase in
medium/long-term comparing to fiat money and leading
cryptocurrencies.
- Investors who are going to use the service and are ready to invest in it to
get more opportunities.

Goals
The framework is intended for:
1. recognizing scam features while ICO
2. assessing risks of ICO
3. comparing announced goals of ICO with the real capabilities of the
project

Contents
1. Team
2. Project
3. PR/Marketing/Community
4. Market
5. Whitepaper
6. Blockchain technology
7. Characteristics of ICO
8. Investors

1. Team
1.1. Founders
We analyze the team of founders and consider the following points:
- How public are team members? (to make sure that ICO is not launched by “virtual people”)
- How much does their skill set match their project? (along with understanding Blockchain
technology they should know the business for their project)
- Do they have positive experience in other projects? (success, failure, indicators)
- How long do they know each other? What do they have in common?
- What is their credibility in the community? (both in blockchain and domain expertise)

1. Team
1.1. Founders
1.1.1. Social networks
1.1.1.1. Facebook (we verify if a person is real, how long he/she uses their account, if he has real
friends, colleagues, relatives)
◎ Registration date
◎ Number of friends
◎ Number of followers
◎ Number of posts
◎ Information about family and private life
◎ Posts on professional topics
◎ Commenting
◎ Posting frequency

1. Team
1.1. Founders
1.1.1.2. LinkedIn (we verify if a person is real, how long he/she uses their account, if he has real
employers, colleagues, partners)
◎ Number of connections
◎ Skill set
◎ Relevant experience
◎ Number of common connections
◎ Number of posts
◎ Education
◎ Detailed CV
◎ Reviews (especially on the skill set)

1. Team
1.1. Founders
1.1.1.3. Instagram
◎ Number of posts

1. Team
1.1. Founders
1.1.1.4. Crunchbase
◎ Connection with projects
◎ Media mentions
◎ Participation in conferences
◎ Country of residence

1. Team
1.1. Founders
1.1.2. Connections with criminal entities, blacklists, bases:
◎ INTERPOL
◎ FATF
◎ https://www.google.com.ua/search?dcr=0&q=family+name+date+of+birth+criminal+case&oq=family+name+
date+of+birth+criminal
◎ https://www.google.com.ua/search?dcr=0&q=family+name+date+of+birth+money+laundering
◎ https://www.google.com.ua/search?dcr=0&q=family+name+date+of+birth+money+fraud
◎ https://haveibeenpwned.com
◎ https://onfido.com/

1. Team
1.2. Advisers
We analyze the team of advisers and consider the following points:
- How public are advisers? (to make sure that ICO is not launched by “virtual people”)
- Do they really take part in the project? They are not celebrities-for-hire, are they?
- What is their credibility in the community? (both in blockchain and domain expertise)
- How many projects have they supervised? How many projects do they observe at the same
time? Have they ever been exposed in scam projects?

1. Team
1.2. Advisers
1.2.1. What makes us consider someone as an expert:
- His/her own implemented projects
- Participation in other projects
- His publications
- Articles/interviews about him
- Participation in conferences

1. Team
1.2. Advisers
◎ Number of posts
◎ Commenting

1. Team
1.2. Advisers
employers, colleagues, partners, if the projects he is involved are present in his profile)
◎ Number of posts
◎ Mention of the project in his profile
◎ Is there projects he added to his profile, but he is not mentioned on the project website /
whitepaper
◎ Is there projects where he is mentioned on the website / whitepaper, but he hasn’t added
them to his profile on LinkedIn
◎ Detailed CV

1. Team
1.2. Advisers
1.2.2.3. Crunchbase
◎ Media mentions

1. Team
1.2. Advisers
◎ INTERPOL
◎ FATF

1. Team
1.3. C-Level
We analyze the non-founding execs and consider the following points:
- How high is the level of their expertise in the market the company is focused on?
- How much does their skill set match their position and the market?
- Do they really take part in the project? They are not fake VIPs, are they?

1. Team
1.3. C-Level
◎ Number of posts
◎ Commenting

1. Team
1.3. C-Level
employers, colleagues, partners, if the projects he is involved are present in his profile)
◎ Number of posts
◎ Mention of the project in his profile
◎ Is there projects he added to his profile, but he is not mentioned on the project website /
whitepaper
◎ Is there projects where he is mentioned on the website / whitepaper, but he hasn’t added
them to his profile on LinkedIn
◎ Detailed CV

1. Team
1.3. C-Level
1.3.2.3. Crunchbase
◎ Media mentions

1. Team
1.3. C-Level
◎ INTERPOL
◎ FATF

1. Team
1.4. Integral evaluation
Besides the quality of the team we evaluate:
- What makes them be together?
- How long do they know each other?
- Are they geographically in the same location?
- Have they already had common projects?
- Do they try to cover up the scam?
- Can they build a company together?
- Who will leave after the ICO is done?
And do not forget about reference calls!

2. Project
While analyzing a project, we run a traditional Due Diligence procedure, which all investors do. Most often projects
reveal very little information about corporate structure in their documents.
We have to know:
- Who are the founders of the project? (sometimes a team is not divided into founders and executives)
- When was the company founded? The story of the company’s foundation, is there any evidence of it in mass
media (interviews/articles)?
- Is there a logical and clear link between the previous experience and the current project?
- What is known about the jurisdiction where the project is registered? Is the company incorporated?
- Does the product already exist?
- Are there any users? What is the number of downloads? What about ratings, сonversion, сhurn rate?
- Is there revenue?
- Does the project have confirmed relationship with technological partners? (the project is mentioned on their
website and other platforms)
- Are there any corporate clients/sales channels? (proofs are needed)
- Can the project be implemented without Blockchain as effectively as with it?
- Has the project raised funding before? What was it spent on?
- How much money is the project going to spend on ICO and what are the sources of it?

2. Project
It is extremely important to understand how Blockchain technology is integrated into the project as there are two
types of projects:
◎ A project that uses Blockchain technology as a payment tool
◎ A project that can hardly or cannot exist without Blockchain technology
In the first case investors just accept risks realizing that any other fiat or cryptocurrency can be used instead of this
payment tool.
We explore the second type of projects to find out whether the usage of Blockchain technology makes the project
over complicated or not.
It also makes sense to check out if the project is feasible. Blockchain is not a solution for all, but a lot of founders
don’t think about it.

Currently every dollar invested in the marketing of ICO yields from $20 to $200 during ICO. Besides
the ICO budget we are also interested in how efficient its usage is.
Fundraising during ICO is possible due to two investor audiences especially when they intersect.
The first audience consists of people who already own cryptocurrency and the task is to compel
them to exchange their coins to coins of the project. They may know almost nothing about the
business and its industry, but they should understand how and why the project coins will grow in
value. For such people the liquidity of traditional cryptocurrencies is not high, so they will easily
exchange them to take part in clear and attractive business. Commonly they own a small coin
portfolio that they purchased during various ICOs.

The second audience is potential users of the service. They participate in the ICO driven by two
motives:
◎ Rational: they want to get more services for their money, which means they expect that the
coins will go up and they will benefit as users.
◎ Emotional: they want to give the project team an opportunity to build a service or a product
using their funding.

The evaluation of each audience, and especially the zone of their intersection, makes it possible to
predict the success of the ICO itself, as well as the demand for the service. It makes it possible to
indirectly assess the potential for the growth of the coin rate in the short-term (within the ICO at
pre-sale, sale and post-sale, first trading) medium-term (as the user base of the project grows) and
long-term.
The audiences are connected, therefore they are important as each in itself, as well as their mutual
influence. Participation of iconic investors in ICO gives a good signal to institutional investors, on
the other hand a large audience of the project and the ability to work with it gives a good incentive
to institutional investors.

3.1. Audience of the project
Access to a traditional audience:
◎ Any of the founders have a Celebrity status
◎ The ability to attract other industry and external celebrities to ICO
◎ Personal channels of communications of the founders (followers in social networks)
◎ Audience of existing projects, to which the founders have access
◎ Availability of databases of potential users:
○ Mailing lists
○ Groups in social networks
○ Channels in Youtube
○ Groups in messengers
○ Controlled media

Strategy of communications:
- Formalized strategy
- Messages
- PR: access to media, bloggers, opinion leaders
- SMM
- Planned advertising campaigns: traditional media, specialized media, PPC (with special
attention to USA, China, Japan, South Korea, Russia)
- Executors: internal project team, contractors (verification of successful cases, availability of
relevant industry expertise)

The visibility of the project is checked.
Traffic volume:
- Similarweb
- Alexa
- Google trends

The visibility of the project is checked.
Social media (accounts, tags, mentions):
- Facebook
- Twitter
- LinkedIn
- Crunchbase
- Angel.co
- Slack
- Telegram
- Reddit
Do not forget to pay attention to the tone of mentions.

3.1. Blockchain community
If the previous section is easy to understand and is done traditionally by any investors at the stage
of Due Diligence, in this section everything is slightly more complicated. Blockchain community is
young and rather closed, contacts of its experts are often not in the public domain, there are not a
lot of websites.
What pay attention to:

Team profiles:
Are there any celebrities or significant experts from the Blockchain community? If any, then we
check if it's a dedicated person, isn’t he a celebrity-for-hire? How he is involved in the project,
whether he participates simultaneously in several projects (this is acceptable for advisers, mentors
and investors, but it is not acceptable for founders or c-level executives)

We track the accounts, profiles and project references on the following websites:
- https://coinfund.io/
- http://icoalert.com
- https://www.forbes.com/podcasts/unchained/
- https://www.smithandcrown.com/
- https://bitcoinmagazine.com/
- https://epicenter.tv/
- https://www.coindesk.com/
- https://www.bitcoin.com/
- https://tokenmarket.net/

We track the accounts, profiles and project references on the following websites:
- https://www.cryptocompare.com/
- https://www.tokendata.io/
- https://cointelegraph.com/
- https://medium.com/token-economy
- https://thecontrol.co/
- https://consensys.net/
- https://coinmarketcap.com
- http://coin.army/
- https://icotracker.net/
- http://icorating.com/
- https://site.cointerminal.co/
- https://santiment.net/
- https://www.quandl.com/
- https://cindicator.com/
- http://www.badbitcoin.org/thebadlist/ (negative references are checked)
Keep in mind that this list should be updated over time with new websites as they emerge rapidly
due to increased demand to the topic.

4. Market
In this section we pay attention to the following:
- Availability of the market information
- If it’s available we compare it with open data and recheck all sources
The main parameters that are important to us:
- TAM
- SAM
- SOM
- GAGR
- Go to market strategy
- Potential market share
- Detailed analysis of the competitors
- USP
- Value
Sources of information: Crunchbase, CB Insights, PrivCo, DataFox, Owler, Tracxn!, Mattermark,
Quandl, Gartner, BCG, McKinsey, Deloitte

5. Whitepaper
A whitepaper is considered to be an important source of information. We evaluate whether it has all
the data to make a decision.
A bad sign is when the whitepaper is not detailed and specific, and the essence of the project is not
clearly defined in it.
There is no standard for a whitepaper format, and this document can be very different in various
projects. Anyway it should be prepared thoroughly and its volume should be sufficient to contain all
the data on the project. It must be well-designed, proofread, not contain errors nor inaccuracies. At
the same time we should understand that scammers count heavily on this document, investing
thousands of dollars into its production. If a professional team has been hired to write it, it can be
really good. General recommendations: if a whitepaper looks excessively good, then you need to
pay more attention to re-checking the facts. The same should be done if a whitepaper looks untidy.

6. Blockchain Technology
While conducting a superficial due diligence, we usually do not have enough knowledge to audit the
technology. That’s why we expect that the community will check everything that can be checked.
Therefore, we assess the understanding of how well the emission is designed by three factors:
1. Availability of all the information in the public domain:
a. https://github.com/, https://bitbucket.org/, https://www.coingecko.com/en and regular updates of
the code (appraisals, comments)
b. Availability of annotations and manuals within the code
c. Matching of functioning of the smart contract and the description in the Whitepaper and on the
landing page
2. Discussion about details on field-specific forums
3. Tone of voice and conclusions of the discussion
What else matters:
- Consensus Algorithms,
- Scalability,
- Governance structures,
- Openness (private, public, consortium),
- Transaction throughput,
- Block size, state channels, sharding,
- Fees, privacy (zero knowledge proofs, cryptography),
- Degree of decentralisation

7. ICO
From the point of view of the ICO itself we analyze the following parameters:
Business Model & Token Design (utility or equity)
TGE
- Transparency
- Parameters (volume, price, discount, time)
- Criteria for success
- Cap
- Acceptable currencies
- Min and Max purchase
- Wallets
- Distribution of tokens (how much goes to a team, how much to sell, distribution among
issues)
- Whether the timeframes for TGE are correctly chosen, how they correlate with the product
strategy and go-to-market strategy
- Escrow
- Use test

7. ICO
Use of fund
Listings and Wallets support
Legal Setup and Audit
Security Audit
The experience of the team of lawyers who did the legal setup and the availability of their
comments (summary) about what was included in the legal analysis
Availability of the Howey Test (SEC) and its results (we examine it in details and take into account
who did it)
Availability of the Family Resemblance Test and its results (we examine it in details and take into
account who did it)
Availability of the Risk Capital Test and its results (we examine it in details and take into account
who did it)
How KYC / AML procedures are implemented

7. ICO
We avoid any ICO where:
◎ The token transfers ownership or equity in the company
◎ The Token transfers the right to get a share in the profitz or a share in the assets
◎ The token provides the holder with a status of a creditor

7. ICO
We’ve been working on an important methodology for evaluating the potential for growth of the
price of the token in the process of the project development:
Estimation of the equilibrium price of the token, based on the increase in the number and volume of
transactions in the system according to the parameters determined in the Whitepaper and by the
volume of the issue

8. Investors
If the company did acquire iconic investors (one of the 85* crypto hedge funds) during the
preliminary negotiations, most likely it will be written on their website.
During the ICO itself, you can see the amounts that are transferred to the wallet and their sources.
It's easy to trace the affiliation of such wallets - they usually do not hide.
However in the past it often happened that the company placed a logo of the fund on their website,
which had no connection to them.
In any case, the amounts that exceed 1000 ethers or 20 bitcoins should be tracked - it can say a lot
during the presale.
Actual list of ICO and Pre-ICO Funds you can find here
https://docs.google.com/spreadsheets/d/1BVGXdP_cR5hO6sdQlTSB-r6qs7xQqYF342FQ9hehT5Q/e
dit#gid=849898236
* The number is valid at the time of writing of this presentation

9. Thanks:
I want to say thank you for following guys for contribution:
Slavik Fokin: https://www.linkedin.com/in/slavikfokin/

Feel free to send your comments and feedback to
denny.do@gmail.com
https://www.linkedin.com/in/dennydo/

Pre ICO Due Diligence Framework by DD

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