The Role of Disclosure and Information Intermediaries in an Unregulated Capital Market: Evidence from Initial Coin Offerings

• Published date: 01 March 2022
• Author: THOMAS BOURVEAU,EMMANUEL T. DE GEORGE,ATIF ELLAHIE,DANIELE MACCIOCCHI
• Date: 01 March 2022
• DOI: http://doi.org/10.1111/1475-679X.12404

DOI: 10.1111/1475-679X.12404

Journal of Accounting Research

Vol. 60 No. 1 March 2022

Printed in U.S.A.

The Role of Disclosure and

Information Intermediaries in an

Unregulated Capital Market:

Evidence from Initial Coin

Offerings

THOMAS BOURVEAU,∗EMMANUEL T. DE GEORGE,†

ATIF ELLAHIE,‡AND DANIELE MACCIOCCHI†

Received 17 July 2018; accepted 13 June 2021

ABSTRACT

Using an international sample of 2,113 initial coin offerings (ICOs), we ex-

plore the role of disclosure and information intermediaries in the unreg-

ulated crypto-tokens market. First, we document substantial cross-sectional

variation in the voluntary disclosure practices of ventures seeking to raise

∗Columbia University; †University of Miami; ‡University of Utah

Accepted by Christian Leuz. We appreciate helpful comments and suggestions from two

anonymous reviewers, an associate editor, Matthias Breuer, Brian Cadman, Gavin Cassar (dis-

cussant), Fabrizio Ferri, Eric Floyd, Henry Friedman, Joao Granja, Luzi Hail, Trevor Harris,

Rachel Hayes, Gerard Hoberg, Zachary Kaplan, Katie Moon (discussant), DJ Nanda, Fahad

Saleh (discussant), Delphine Samuels, Doug Skinner, ˙

Irem Tuna, and seminar participants

at the 2018 London Business School Accounting Symposium, the 2018 NEOMA Workshop

on FinTech and Cryptof‌inance, the 2019 Conference on Emerging Technologies in Account-

ing and Financial Economics at the University of Southern California, Bocconi University,

Harvard Business School, LUISS University, and the University of Utah. We acknowledge

the f‌inancial support of our respective schools. This paper was started when De George was

on the faculty at London Business School. A previous version of the paper was circulated

with the title “Initial Coin Offerings: Early Evidence on the Role of Disclosure in the Un-

regulated Crypto Market.” An online appendix to this paper can be downloaded at http:

//research.chicagobooth.edu/arc/journal-of-accounting-research/online-supplements.

129

© 2021 The Authors. Journal of Accounting Research published by Wiley Periodicals LLC on behalf of The

Chookaszian Accounting Research Center at the University of Chicago Booth School of Business

This is an open access article under the terms of the Creative Commons Attribution License, which

permits use, distribution and reproduction in any medium, provided the original work is properly cited.

130 t. bourveau, e. t. de george, a. ellahie, and d. macciocchi

capital through ICOs, such as the extent of information released in a

prospectus-type document called a white paper; releasing the technical

source code; and communicating through social media platforms. Second,

we f‌ind that, even with limited disclosure verif‌iability, ventures with higher

levels of disclosure have a greater ability to raise capital. Finally, we f‌ind that

this association is stronger in the presence of mechanisms that lend credibil-

ity to ventures’ voluntary disclosures, such as internal governance practices or

external scrutiny from information intermediaries. Overall, our results sug-

gest that voluntary disclosure and information intermediaries facilitate the

functioning of ICOs as an alternative capital market.

JEL codes: G10, G24, G32, G34, M40, M41

Keywords: initial coin offering; crypto-tokens; disclosure; information in-

termediaries; ratings; unregulated capital markets

1. Introduction

The crypto-tokens market has recently emerged as an alternative source

of f‌inancing for entrepreneurial ventures, with approximately $15 billion

raised globally through 2019. These ventures issue blockchain-based digi-

tal “crypto-tokens” through an initial coin offering (ICO) to raise external

capital. In return, a token provides holders with various benef‌its, such as

“utility” value through access to the venture’s current or future product

(or service), potential participation in future prof‌it distributions, and the

ability to subsequently trade the token on crypto-exchanges.

The global ICO market has emerged without investor protection rules or

disclosure regulations, instead, relying primarily on voluntary, unaudited,

and largely unverif‌iable disclosures to reduce information asymmetries be-

tween issuers and investors. The cross-jurisdictional and decentralized na-

ture of this online capital market also reduces the ability of investors and

regulators to enforce any legal protections that may exist. Although the

lack of disclosure verif‌iability, regulatory oversight, and channels for legal

recourse increase the likelihood of fraud and cheap talk, theory predicts

that voluntary disclosures can still be informative (e.g., Crawford and Sobel

[1982], Gigler [1994], Stocken [2000]) and ICO information intermedi-

aries have emerged to try to further mitigate information frictions. We in-

vestigate the ICO market to provide descriptive evidence on (1) ventures’

voluntary disclosure practices; (2) whether the extent of voluntary disclo-

sures is associated with the ability to raise capital; and (3) the mechanisms

that lend credibility to ventures’ voluntary disclosures, such as internal gov-

ernance practices or external scrutiny from information intermediaries.

We examine these three questions using a sample of 2,113 ICOs between

March 2014 and October 2018. Based on the location of the ventures’ team

members or self-declared aff‌iliation, we observe ICOs from over 100 coun-

tries with the United States (16%), the United Kingdom (12%), Singapore

(9%), and Russia (6%) contributing the most to our sample.

role of disclosure and information intermediaries in unregulated markets

131

The f‌irst part of our paper investigates the voluntary disclosure practices

of ventures attempting an ICO. The primary source of voluntary disclo-

sure prior to the ICO is a white paper, which is conceptually similar to a

traditional initial public offering (IPO) prospectus. We f‌ind that white pa-

pers vary substantially in length (18–37 pages) and readability (14.6–17.5

Gunning Fog index) at the 25th and 75th percentile level. The items com-

monly disclosed in the white papers are similar to typical disclosure topics

in IPO prospectuses, such as business, management, executive compensa-

tion and governance, and offering-related information. Virtually, all white

papers provide at least some narrative description of the venture’s primary

business purpose; 81% also disclose a roadmap or timeline for the develop-

ment of the product or service, 71% provide information on the identities

and professional biographies of team members, and 66% disclose informa-

tion on their incentive structure (i.e., allocation of tokens to insiders). We

interpret these disclosures as mechanisms to build trust with investors and

enable verif‌iability of skills. Some ICO ventures also borrow governance

and incentive alignment practices, such as vesting and lock-ups for insider

shares, from the IPO market. We f‌ind that 26% of white papers contain

information on the vesting of insiders’ tokens, with vesting periods rang-

ing from 3 to 12 months after the ICO, and 65% of white papers contain

information about the expected use of proceeds from the ICO.

Yet, we observe that some disclosure patterns in white papers differ from

IPO prospectuses with regard to risk, f‌inancial, and dividend disclosures.

Only 4% of white papers mention venture-specif‌ic risk factors, and less

than 2% provide any f‌inancial information or projections. This is partly

because ICO ventures are smaller and at an earlier stage than f‌irms that

pursue IPOs. Like pre-revenue f‌irms seeking venture capital funding, ICO

ventures appear to be reticent about disclosing detailed f‌inancial projec-

tions (Mohamed and Schwienbacher [2016]). Only 14% of white papers

contain information on future dividends or distributions, which is lower

than the frequency of such disclosures in the international market for tra-

ditional IPOs (Ellahie and Kaplan [2021]). Finally, 6% of white papers are

purely technical documents that contain no marketing information.

ICO ventures also voluntarily disclose information through sources other

than white papers. We f‌ind that 53% of the ICO ventures in our sam-

ple release the technical source code for their software product or token

smart contract through online code repositories (e.g., Github), which al-

lows investors and customers to conduct technical due diligence and assess

competitive differentiation; 63% release a video marketing presentation,

and 97% are active on social media platforms, such as Facebook, Twitter,

and Medium. We see video presentations as serving a similar purpose to

IPO roadshow presentations (Blankespoor, Hendricks, and Miller [2017]),

while social media presence enables ICO ventures to communicate directly

with potential participants. Overall, our descriptive evidence documents

substantial cross-sectional variation in ICO ventures’ voluntary disclosure

practices.