Initial coin offerings (ICOs) have become the prevalent source of financing for start-up companies that use blockchain technology, raising more than 30 billion dollars in funding to date. In an initial coin offering, contributors make a financial contribution to a business venture or project and receive a cryptographic token in exchange. The token can then be exchanged to use a product or service provided by the issuer in the future, or less commonly, confers cash flow rights onto its holder. The tokens typically trade on specialized exchanges shortly after the ICO.
Our paper studies the composition and trading behavior of the investor base in a sample of successful ICOs. Information on the nature and behavior of investors is important to understand what role ICOs can play in the financing of innovation in the future as well as to provide guidance to regulators on how to treat ICOs.
We study public transaction data from Ethereum, the platform that hosts most ICOs. We find that the average ICO has 4,700 contributors that make a median investment of only $1,200. Based on these results, the representative participant is likely a retail investor, i.e. an investor that regulators typically seek to protect. We also find that almost half of all contributors sell some or all of their tokens in the secondary market within ninety days of the ICO, suggesting that most contributors are motivated by short-term financial gains. ICOs are typically conducted in two stages: a closed presale stage for large investors, often taking place at discounted prices, and a public crowdsale stage. If the prevailing secondary market price after the ICO is at or above the presale price, presale investors can realize a profit by selling immediately. We find evidence that they frequently do so.
Most companies financing themselves through ICOs have unproven business models and are in the pre-product stage. The financing of such early stage companies has previously been the domain of specialized angel investors or venture capitalists who acquire soft information by meeting with potential customers, suppliers, and the founding team, and who demand securities guaranteeing priority and control rights. We investigate whether the ICO market has emulated some of these investor protections and find that ICO investors receive very few rights compared to traditional early stage investors. The only investor protection provision from venture capital contracts that is also common in ICOs is vesting periods for founders.