Abstract

We conduct a detailed analysis of investors in successful initial coin offerings (ICOs). The average ICO has 4700 contributors. The median participant contributes small amounts and many investors sell their tokens before the underlying product is developed. Large presale investors obtain tokens at a discount and flip part of their allocation shortly after the ICO. ICO contributors lack the protections traditionally afforded to investors in early-stage financing. Nevertheless, returns 9 months after the ICO are positive on average, driven mostly by an increase in the value of the Ethereum cryptocurrency.

Highlights

  • In an initial coin offering (ICO), an entrepreneur raises capital by selling a newly minted cryptographic token to the public

  • We briefly describe the typical structure of an initial coin offering and summarize the characteristics that are important for our subsequent analysis in Table 1.12 In an ICO, an issuer sells a newly minted cryptocurrency or cryptographic token to the public

  • Product or prototype developed Qualified investors only US retail investors excluded High-quality advisory team Use of proceeds mentioned Legal advisor disclosed Has venture capitalists (VCs) backing know your customer (KYC)/AML procedure Panel B: Investor protection Is a security Legal form and jurisdiction known Legal entity is corporation or liability corporation (LLC) Registered in offshore financial center Funding milestones Independent custodian for ICO funds Team tokens locked up Team lockup period Presale tokens locked up Presale lockup period Investors have governance rights

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Summary

Introduction

In an initial coin offering (ICO), an entrepreneur raises capital by selling a newly minted cryptographic token to the public. The token is usually listed on a specialized exchange quickly after the ICO, creating a secondary market. ICOs have become the prevalent source of financing for start-up companies that use the blockchain technology; more than $30bn have been raised so far through ICOs (Lyandres and Palazzo 2020).. Entities conducting ICOs have unproven business models and are most often in the preproduct stage. There exists virtually no hard information on them, and asymmetric information is large. The financing of such early-stage companies has previously been the domain of highly specialized angel investors or venture capitalists (VCs) who

B Rüdiger Fahlenbrach
Primary market data
Secondary market data
Ethereum blockchain data
Description of the ICO market
Analysis of ICO investors
Data quality and representativeness of the investor sample
Average contribution size
Determinants of investor participation in the crowdsale
Fraction of repeat contributors
Are contributors motivated primarily by financial returns?
What properties of ICOs make them attractive to investors?
Do the large discounts to presale investors impact their trading behavior?
Investor protection
Cash flow rights
Liquidation preferences
Lockup periods
Control rights in angel investments
Empirical analysis of ICO secondary market returns
Return summary statistics
Determinants of returns
Conclusion
Findings
Funding milestones
Full Text
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