• Michael Dynes

Study finds greater disclosure boosts prospects of initial coin offering success

Updated: Sep 21, 2018

Initial coin offerings (ICOs) are less likely to crash and burn if they provide prospective investors with the transparent information they need to make informed judgements from the outset, an international academic study has confirmed.

There is little indication that the momentum behind ICOs as a novel form of fund-raising is likely to falter in the short to medium-term, but in the absence of regulation it is in the interests of project sponsors to ensure maximum possible disclosure to investors, the study added.

An analysis of a global sample of 776 ICOs that took place between April 2014 and May 2018 – only 659 of which were actually completed – demonstrated that an ICO was significantly more likely to be successful if it:

· made public the source code governing its smart contracts

· provided genuinely informative White Papers

· mobilised substantial social media activity

· provided incentives for retaining key personnel post-ICO

· issued tokens that are well rated by crypto-market information intermediaries

‘Checklist for success’ boosts investor confidence

This “checklist for success” has become essential for investors seeking to navigate their way through the unregulated cryptocurrency and blockchain landscape, while national authorities take their time before deciding how best to supervise this emerging new asset class.

ICOs, which raise money for start-ups by issuing tokens – or cryptocurrencies – in exchange for investors’ money, lack the mandatory regulatory safeguards that initial public offerings (IPOs) on a stock market typically offer investors. This makes it incumbent on ICO offerings to ensure the best possible investor protection against fraud and failure – in their own interests.

The study jointly written by the London Business School, Columbia Law School and the University of Utah, found that some $13 billion was raised between 2014 and 2018 across 50 countries and 650 issuers – with messaging service Telegram alone raising a cool $1.7 billion.

Emmanuel De George, Assistant Professor of Accounting at the London Business School, a co-author of the report, said that ICOs were now running at the rate of 100 a month.

ICOs ‘by far the cheapest way of raising capital’

He added: “We don’t envisage that to be slowing down at all.” On the contrary: “What you are seeing is a lot of entrepreneurs with a lot of ideas. This is by far the cheapest way of raising capital because you don’t have the regulation that comes with other forms of capital raising,” he said.

The study concludes that regulation to improve transparency is inevitable, but that a number of far-sighted ICOs were already ahead of the pack by providing investors with the essential information they needed to evaluate ICOs, saying: “It is hard to believe that the ICO market will remain completely unregulated for much longer, and this market is not going to disappear.”

Transparency included making available the source code for the tokens to show that there was a finite supply of them, and that tokens held by founders could only be cashed-in over time, and not in the immediate aftermath of an ICO – at which point key executives have little or no incentive to remain on board to ensure the long-term success of the project.

ICO White Papers are ‘equivalent to prospectus of an IPO’

Providing informative White Papers – the equivalent of an IPO prospectus – and being rated by ICO market information intermediaries such as ICObench, ICORating, ICO Drops and ICO Alert, also helped to reassure prospective investors, the report added.

By contrast, those ICOs with weaker levels of disclosure tended to experience higher levels of illiquidity and volatility after the ICO, the study added. Poor disclosure led to some ICOs crashing – losing 75% or more of their value within a few months after their ICOs, the study found.

The regulatory response to the emergence of this new asset class has been anything but coherent. China and South Korea have banned them, the US Securities and Exchange Commission is investigating the more egregious offenders while trying to bring the rest into the orbit of securities regulation, and the British regulatory authority is still making up its mind.

The G20 discussed the possibility of regulating ICOs in March, given that the crypto market operates on decentralised international platforms, making it hard for one country to get a grip on the sector by itself. G20 finance ministers agreed to continue monitoring the situation but the study authors said: “Our team feel that regulation is around the corner.”

The Aziza Project, which is seeking to raise $60 million from its ICO due in the final quarter of 2018 to help fund a ten-well drilling programme in search of hydrocarbons on Africa New Energies’ 22,000 square kilometre concession in Namibia, backs the ‘checklist for success’ in an effort to help mobilise investor confidence in its exploration activities.

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