Initial Coin offerings: what rights do investors have?

Abstract

This paper reviews the growing literature on initial coin offerings (ICOs) and provides original evidence of the investor protection on ICOs from 37 countries. We show that the anti-director rights and anti-self-dealing index are positively associated with the country-level raised fund of ICOs after controlling for economic and culture factors. The disclosure quality and investor rights as specified in the Whitepapers are generally poor and they are found to be important to raise more funds in ICOs. We argue that the lack of (self-) discipline poses a threat to investor protections. Around 60% Whitepaper do not disclose information on the use of proceeds or management team. Around 80% ICOs do not entitle investors the rights for dividend or vote. Our findings suggest the needs of regulating ICOs to protect investors.

Keywords:

• Fintech
• Investor Protection
• Fraud
• Shareholder right
• Disclosure
• Initial Coin Offering

Acknowledgements

We thank the participants at the 1st Conference on Entrepreneurial Financial Management at ESMT Berlin in 2016 and Shanghai Fintech Conference in 2017 for helpful suggestions.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

Notes: This paper summarises the sample and findings in the literature. For main data sources: $◯1$ represents icobench.com; $◯2$ represents coinmarketcap.com; $◯3$ represents icodrops.com; $◯4$ represents icorating.com; $◯5$ represents icodata.io; $◯6$ represents tokendata.io; $◯7$ represents trackico.com or icotracker.com, $◯8$ represents coinschedule.com, $◯9$ represents crunchbase.com; $◯10$ represents tokenmarket.net; $◯11$ represents icomarks.com; $◯12$ represents cryptoslate.com, coindesk.com, bitcointalk or etherscan.io; $◯13$ represents icoholder.com, icoalert.com, smithandcrown.co, cryptocompare.com, foundico.com, coingecko.com; $◯14$ deadcoins.com or coinopsy.com.

Note: This paper presents the descriptive statistics. Variables are defined in Table 2.

Notes: The table presents the results of regression total funds raised from ICO on four types of investors’ rights provided by ICO companies. The dependent variable is the Ln (Total Amount of ICO funds raised in U.S. Dollars). Our key interest variables are the token holders’ rights offered by ICO firms, namely Voting in column (1-2), Dividend in column (3-4), and Disclaimer Clause in column (5-6). Other variables are defined in Table 2.

Notes: The table presents the results of regression total funds raised from ICO on four types of investors’ rights provided by ICO companies. The dependent variable is the Ln (Total Amount of ICO funds raised in U.S. Dollars). Variables are defined in Table 2. Column (3–4) and (5–6) are based on sub-samples of equity-type ICOs and currency-type ICOs.

Notes: The table presents the results of regression total funds raised from ICO on five disclosure items in company ICO whitepapers. The dependent variable is the Ln (Total Amount of ICO funds raised in U.S. Dollars). Our key interest variables are the disclosure items in company ICO whitepapers, namely Risk Factor, Usage of Proceeds Management Team, Roadmap and Operating Country. Variables are defined in Table 2.

Notes: The table presents the results of regression total funds raised from ICO on five disclosure items in company ICO whitepapers. The dependent variable is the Ln (Total Amount of ICO funds raised in U.S. Dollars). Variables are defined in Table 2. Column (3-4) and (5-6) are based on sub-samples of equity-type ICOs and currency-type ICOs.

1 See https://www.coinschedule.com/stats.

2 A white paper is a voluntary disclosure document that resembles in essence a prospectus in initial public offerings (Howell, Niessner, and Yermack 2019). However, due to the absence of regulation, the disclosure quality varies substantially across projects. Mostly it describes the rights and benefits to potential investors, operation risks and how its blockchain structure functions.

3 Given the nature of this special issue, we focus our attention on empirical studies on ICOs, while acknowledging important theoretical works, including Li and Mann (2018), Sockin and Xiong (2018), and Cong, Li, and Wang (2019).

4 Papers may appear more than once in Table 1 since some studies cover several lines of enquiry as we summarized here.

5 This method has its own problems. For example, lack of unique identifier for each project, the process of matching across databases is challenging and prone to errors.

6 Tokens are cryptographically secured digital assets sold by ICO projects. In general, there are two types of tokens. A security-type token represents investors' cash flow and voting rights, while a utility- or consumption-type token represents the right to consume the product in the future.

7 In a related study, Huang, Meoli, and Vismara (2020) examine the impact of the quality of a country’s financial institutions on the frequency of ICOs. They find that ICOs take place more frequently in countries with developed financial systems, public equity markets, and advanced digital technologies.

8 IPO data is obtained from US IPO database provided by Jay R. Ritter. The sample contains 8360 IPOs between 1980 and 2017 in the US.

Additional information

Funding

Wenxuan Hou and Xiaoju Zhao (Guest Editors) acknowledge financial support from Shanghai University of Finance and Economics and are grateful to Chris Adcock (the editor) for his support for this special issue.