Abstract
The blockchain technology is one of the grand challenges for the governance of new entrepreneurial projects. Thanks to this decentralized mechanism of certification, teams are now able to organize Initial Coin Offerings (ICOs) and raise money on the Internet offering digital tokens, bypassing any screening or control from central entities and independent auditors. While many of the governance mechanisms applied in traditional venture financing do not apply to ICOs, contributors may rely ex ante on the quality of the team and on unaudited information disclosed in a ‘white paper’, ex post on the development on enforcing digital ‘smart contracts’. In this work we study the governance signals of ICO-backed projects (token rights, institutional setting, team quality), analyzing a sample of 935 offerings. We examine the relationship between governance issues and the fundraising success and we find that both the project team and advisory committee size is positively and significantly correlated with the success. When the fraction of tokens retained by insiders and managers is larger, the probability of fundraising success is also larger, but to a lower extent if the token gives access to a service (‘utility token’). Specific provisions about the future jurisdiction and incorporation of the project are not considered as a credible governance signal. On the contrary, past managerial experience of the proponents is a valuable asset for contributors.
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Notes
Smart contracts are programmable contractual tools embedded in a software code. Thus, a smart contract can include the governance arrangement itself, stating the preconditions necessary for the contractual obligations to take place and the actual execution of the contract (Koulu 2016).
Sources: National Venture Capital Association and Invest Europe.
Sources: platform web sites.
An Initial Exchange Offering relies on an exchange as the counter-party of the offering. Developers mint the digital tokens and send them to the exchange, which will place the tokens to individual contributors. A Security Token Offering represents an investment contract into an underlying asset and complies with the regulation of security placements, as in a standard public offering.
Following Adhami et al. (2018), we use TokenData.io as the starting point for the ICO list creation as it proved to be reliable since the onset of the ICO phenomenon. Surely, ICOBench.com and other aggregators provide more information regarding each single issue (and this information is also used by our sample) but we find that they are less accurate or complete when defining ‘failed’ ICOs.
E.g., see the report by PWC and Cripto Valley “Initial Coin Offerings: a Strategic Perspective”, June 2018.
Sources: http://www.kickstarter.com and http://www.crowdcube.com.
In Vietnam 32,000 pledgers in two allegedly fraudulent initial coin offerings lost $660 million, according to news agencies. See also Zetzsche et al. (2017).
In September 2017, the US SEC charged two ICOs that allegedly placed unregistered securities. Many other episodes followed up.
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Giudici, G., Adhami, S. The impact of governance signals on ICO fundraising success. J. Ind. Bus. Econ. 46, 283–312 (2019). https://doi.org/10.1007/s40812-019-00118-w
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DOI: https://doi.org/10.1007/s40812-019-00118-w