A comparative study of token offering mechanisms ICOs vs. STOs

Bachelor Thesis, 2021

35 Pages, Grade: 1,7


Table of contents

List of figures

List of tables

1 Introduction

2 Institutional background
2.1 ICOs and STOs: An overview
2.2 ICO process
2.3 STO process
2.4 A comparison: ICOs vs. STOs vs. IPOs
2.5 Evolution of token offering markets
2.6 Regulatory background
2.6.1 Switzerland
2.6.2 Singapore
2.6.3 United Kingdom
2.6.4 United States of America
2.6.5 European Union

3 Theory and hypotheses
3.1 Asymmetric information
3.2 Signaling theory
3.2.1 Certification effect
3.2.2 Information cascades

4 Data and variables
4.1 Data
4.2 Variables
4.2.1 Dependent variables
4.2.2 Independent variables
4.2.3 Control variables

5 Empirical results
5.1 Descriptive analyses
5.1.1 Model 1
5.1.2 Model 2
5.1.3 Model 3
5.2 Main Results
5.2.1 Model 1
5.2.2 Model 2
5.2.3 Model 3

6 Discussion and conclusion
6.1 Discussion of the main results
6.2 Contributions of this study
6.3 Limitations and avenues for further research


List of figures

Figure 1 - The evolution of the ICO market - Amount raised and number of ICOs from 2017 – 2019..

List of tables

Table 1 - A comparison of Initial Coin Offerings, Security Token Offerings, and Initial Public Offerings.

Table 2 - Descriptive statistics - Model 1.

Table 3 - Descriptive statistics - Model 2.

Table 4 - Descriptive statistics - Model 3.

Table 5 - OLS regression.

1 Introduction

A token offering is a novel mechanism that enables firms to raise funding by issuing tokens to external investors (Momtaz, 2019a; Fisch, 2019; Howell et al., 2018). Tokens are digital assets that are cryptographically secured and based on distributed ledger technology (DLT), whereas blockchain technology is the most prevalent type of DLT. Depending on the type of token issued in a token offering, one can distinguish between initial token offerings (ICOs) and security token offerings (STOs). Utility and currency tokens are issued in ICOs, security tokens are issued in STOs. Both mechanisms differ in their degree of regulation as STOs fall under much stricter securities regulations.

Fundraising mechanisms are a prime topic in finance literature as firms require capital to grow (Gompers and Lerner, 2004), and there is fierce competition for capital (Chemmanur and Fulghieri, 2013). Initial work examining token offerings predominantly provides studies focusing ICOs (e.g., Momtaz, 2019a; Fisch, 2019). However, there is a lack of studies focusing on STOs, with the exception of Lambert et al. (2020). I seek to extend the finance literature by focusing on both ICOs, and STOs. Hence, I provide a comparative analysis of both fundraising mechanisms: ICOs vs. STOs.

Therefore, I draw on Spence’s (1973) signaling theory, which deals with overcoming information asymmetry. Information asymmetry is a present phenomenon in the token offering context between firms in need of capital and external investors. Hence, investors find it difficult to distinguish high-quality firms from those with low-quality (Momtaz, 2019b). Consequently, investors demand a discount on the firm value. The signaling theory suggests that high-quality firms should effectively signal investors their high quality to enable investors to distinguish them from low-quality firms. Hence, information asymmetry would be reduced, and firms can profit from it as investors demand a lower discount on the firm value (Connelly et al., 2011). In my study, I examine whether this effect is observable in practice by comparing ICOs with STOs. A phenomenon like the certification effect or an information cascade can be associated with the signaling theory. I apply both phenomena and examine whether they significantly influence token offerings to complement my study.

Given the higher regulation of STOs, I argue that they can signal their high quality much more effectively to external investors. Hence, they reduce information asymmetry more effectively and consequently raise a higher funding amount than ICOs. Besides, I argue that institutional investor backing in ICOs can convey a certification effect and increase ICOs’ funding amount. Lastly, I argue that a high trading volume in the first week after a firm’s token’s initial listing positively influences the firm’s long-term success.

My findings contribute to the finance literature, in particular concerning token offerings. Drawing on prior research that applies the signaling theory to ICOs (Momtaz, 2019b; Fisch, 2019), I extend the literature by focusing on STOs. My findings show that conducting a STO does not significantly affect the amount raised in a token offering. This indicates that investors do not seem to consider the nature of a token offering in their investment decision. Furthermore, I show that the backing of institutional investors does not significantly influence the funding amount raised. Lastly, I provide results, which indicate that a high trading volume in the first week after a firm’s token’s initial listing does not significantly influence the firm’s long-term success. I include several control variables in my analyses to rule out confounding effects and explore additional influences.

2 Institutional background

2.1 ICOs and STOs: An overview

Token offerings or token sales are a novel approach to raising external capital in entrepreneurial finance, whereby firms issue tokens to a group of investors and receive funding in exchange (Howell et al., 2019). Hence, they represent an alternative to conventional methods of raising capital, such as crowdfunding, business angels, venture capital, or initial public offerings (IPOs). Token offerings are primarily programmed as smart contracts on a blockchain. A blockchain embodies a public, decentralized ledger, which can record an entire transaction history chronologically and the ownership of issued tokens (Yermack, 2017). Smart contracts are digital contracts that are executed automatically as soon as predefined conditions are met. In the context of token offerings, smart contracts fully automate the exchange of investors’ external capital with tokens issued by the venture, making traditional financial intermediaries redundant and thus avoiding compliance and intermediary costs (Kaal and Dell'Erba, 2017; Sameeh, 2018).

Tokens or crypto assets are cryptographically secured digital assets based on DLT (Momtaz, 2019b). By now, there a terminological standard for crypto assets does not exist. Hence, I use ‘tokens’ and ‘crypto assets’ as synonyms in this paper. Furthermore, I divide tokens into three token types: utility, currency, and security tokens. Each existing token shares characteristics of one of those token types to an individual extent. However, as tokens may share characteristics of several token types, they are not mutually exclusive. Those are referred to as hybrid tokens, which can be interpreted as a fourth token type (Hacker and Thomale, 2017). However, hybrid tokens are not further discussed in this paper.

Utility tokens are issued in ICOs. They are comparable to a pre-paid digital coupon as they provide their holder with a consumptive right to access products or services the issuing firm wants to develop at an undefined point in the future. Voting rights or shares in the issuing venture are not granted by utility tokens (Howell et al., 2019).

Currency tokens, also referred to as exchange or payment tokens, serve as a store of value or a means of payment to purchase goods or services outside of their issuing platform. Like utility tokens, currency tokens are issued in ICOs.

Security tokens are the third token type, which are issued in STOs. Generally, they are considered as traditional securities investments that generate a future profit for the token holder. In some cases, security tokens also convey voting rights to the token holder (Li and Mann, 2017). For these reasons, security tokens fall under strict securities laws, which are discussed in section 2.6.

Although initial exchange offerings (IEOs) are beyond this paper’s scope, a remark about them is necessary. They are token offering type which differs in the fact that issued tokens are directly offered by a token exchange platform on behalf of the issuing firm (Deloitte, 2019).

2.2 ICO process

Preparation of the ICO

Every ICO process begins with defining a future project the firm wants to launch and the preparation of a whitepaper. Once the whitepaper is created, the firm starts to conduct marketing activities to attract the highest possible number of investors. Early marketing activities are essential for the firm as the project’s success is strongly influenced by the network the firm builds. For this purpose, the project’s whitepaper is disseminated on various social media platforms and forums (Momtaz, 2018a). Additionally, information about the unique features of the project and the team’s expertise will be published to convince potential investors of the project’s potential (Deloitte, 2019).

Furthermore, it is crucial for the organization to ensure that its token does not qualify as a security token as they fall under much stricter securities laws. Securities laws require firms to meet various conditions, making it much more challenging to design a token offering (e.g., SEC 2017).


Some firms decide to launch a pre-ICO to cover costs arising from the actual ICO. These costs include, for example, costs for marketing campaigns and strategic hires. Pre-ICOs may also be conducted for strategic reasons. The firm can use the pre-ICO to obtain information from potential investors about the token’s fair price. Hence, a pre-ICO can help a firm determine the total funding amount and increase the efficiency of the actual ICO. Investors of pre-ICOs usually include early adopters to purchase tokens at a lower price than in the actual ICO (Momtaz, 2018).


In this phase, the ICO is conducted, and the organization starts to sell tokens. The project’s tokens are transferred to investors in exchange for funds. The transaction is usually settled through smart contracts under the technical standard Ethereum Request for Comment 20 (ERC-20) on the Ethereum blockchain (Harvey et al., 2020).

When an ICO starts and how long it endures is individually determined by the organization conducting the ICO. Some ICOs endure for several years, while others are completed within a single day (Fisch, 2019).


After an ICO, the issued tokens can get listed on a token exchange platform. Through the listing, tokens can be publicly traded and attract further investors as they provide them with high liquidity. The token’s price might increase over time, and the firm might have the opportunity to sell the remaining tokens it did not offer in the ICO, making further profits (Momtaz, 2018).

2.3 STO process

Preparation of the STO

Like the ICO process, the STO process begins with a project team’s definition of a vision. Generally, STOs are more challenging to prepare as security tokens qualify as traditional securities and hence are subject to stricter regulations. Thus, project teams usually consider engaging several sophisticated advisers to prepare the whitepaper and design the offering. Financial advisers can help select the type of security token and its structuring, while legal advisers can create the offering’s legal design. Further, legal advisers can advise an appropriate jurisdiction to incorporate the issuing entity and conduct the token offering (Lambert et al., 2020).


In this phase, the STO starts, and the project team initiates marketing activities. Ideally, the project team attracts a cornerstone investor as early as possible to realize positive signaling effects in the broad market. Marketing activities are initiated to attract potential investors by setting up a professional website, using social media platforms, or issuing press releases. Interested investors sign an offering documentation, which includes purchase agreements and a term sheet. To complete the token sale, investors exchange funds for the equivalent number of tokens (Lambert et al., 2020).


The listing of the issued security tokens on a suitable token exchange platform describes the last phase of a STO. Typically, the listing process includes disclosure requirements the firm has to meet. Additional marketing activities usually accompany the listing process to draw the attention of further investors.

2.4 A comparison: ICOs vs. STOs vs. IPOs

In this section, ICOs, STOs, and IPOs are compared concerning asset, deal, and investor characteristics. An overview is given in Table 1.

Asset characteristics

Generally, IPOs represent the conventional way of raising capital by issuing equity shares, whereas token offerings represent a new approach of raising capital by issuing tokens based on DLT (Fisch, 2019). Hence, an apparent distinction between ICOs, STOs, and IPOs concerns the issued asset. While tokens are issued in ICOs and STOs, equity shares are issued in IPOs. Although STOs and IPOs differ fundamentally in their approach to raising capital, their issued assets, i.e., security tokens and equity shares, can be similar in their features. Along with different approaches to raising capital goes a differing degree of regulation. A token offerings’ degree of regulation is mainly dependent on the issued token’s type and the venue of the issuance. Since security tokens usually qualify as financial instruments, they are subject to strict securities laws, like equity shares. Tokens issued in an ICO typically fall under consumer protection laws and anti-money laundering laws. STOs and IPOs are generally stricter regulated than ICOs (Lambert et al., 2020).

The liquidity a token provides depends on whether it is listed on a token exchange platform. Once a token is listed on an exchange, they provide investors with high liquidity (Deloitte, 2019). Tokens issued through both ICOs and STOs can get listed on an exchange platform. Equity shares issued through an IPO provide investors with high liquidity as they are listed on an exchange platform.

Deal characteristics

ICOs and STOs are increasingly popular among investors. A significant reason for this is that both mechanisms allow firms to raise large amounts of external capital with low transaction costs, unlike IPOs associated with high transaction costs (Fisch, 2019).

Although a firm can theoretically carry out an ICOs at any development stage, most firms conduct ICOs in an early stage. This contrasts with STOs as they are carried out regardless of the firm’s development stage (Lambert et al., 2020). IPOs are conducted in an advanced stage as they are used to raise high-volume growth capital for established firms (Momtaz, 2018a).

Lambert et al. (2020) argue that STOs are designed to finance a firm, while ICOs are rather about firm funding. Hence, capital raised through STOs affects the issuing firm’s right-hand side of the balance sheet (equity or long-term liabilities). By contrast, capital raised through an ICO affects the issuing firm’s income statement (revenue). However, capital raised through ICOs might also be interpreted as short time liabilities. In this case, ICOs are a form of working capital finance, affecting the right-hand side of the balance sheet. Even though both token offering mechanisms deal with raising capital, they differ along this line, according to Lambert et al. (2020).

Investor characteristics

ICOs, STOs, and IPOs attract a broad range of investors, whereas investors’ motives may vary. ICOs attract investors with financial and non-financial motives, whereas investors with non-financial motives include altruistic investors, early adopters, or investors interested in a firm’s products (Momtaz, 2018b). One may argue that utility tokens are sold to users rather than investors. Contrarily, STOs and IPOs are less likely to attract investors with non-financial motives. They primarily attract investors with financial motives since security tokens and equity shares represent investment opportunities, which provide investors with high liquidity (given the listing on an exchange) (Deloitte, 2019).

Table 1 - A comparison of Initial Coin Offerings, Security Token Offerings, and Initial Public Offerings.

Abbildung in dieser Leseprobe nicht enthalten

2.5 Evolution of token offering markets

The idea of raising capital by issuing a new token was first conducted by Mastercoin (now called Omni) in July 2013. Mastercoin’s ICO was able to raise about USD 5 m in Bitcoins (Shin, 2017). Several ICOs have followed since then and caused an ICO boom in the second half of 2017. However, the boom ended in 2018, numbers of token offerings have decreased drastically. By the end of 2019, almost 6000 ICOs have been conducted, raising a total amount of more than USD 22bn, wherein the ten largest ICOs raised a cumulative amount of USD 4 bn. By contrast, 90 STOs have been conducted as of October 2020, raising a total amount of more than USD 350 m. An extensive overview of ICO’s and STO’s markets’ evolution is provided in Figure 1, wherein the cumulative market volume and the number of projects is portrayed. I obtained the data from Prof. Dr. Paul P. Momtaz (Momtaz, 2021).

Figure 1 - The evolution of the ICO market - Amount raised and number of ICOs from 2017 – 2019. Due to missing data, year 2020 is not included in Figure 1 and an overview of STOs is not provided.

Abbildung in dieser Leseprobe nicht enthalten

2.6 Regulatory background

This section provides an overview of the regulatory background of token offerings. In general, a distinction can be made between jurisdictions that support token offerings and those that prohibit them. For example, in South Korea and China, ICOs are banned due to considerable potential for fraud and high investment risk (Fisch and Momtaz, 2019). Supporting countries have created a regulatory framework to enable token offerings under certain conditions. This overview refers to the significant supporting jurisdictions defined as countries with the highest number of token offerings, including Switzerland, Singapore, the United Kingdom, the United States, and the European Union.

This section shows several similarities in how crypto assets are regulated in the major jurisdictions. However, there is still uncertainty about how token offerings are to be regulated if consumers of several countries are involved. The fact that there are some differences in how jurisdictions regulate tokens combined with their cross-border dimensions illustrates one of the difficulties regulators are facing and still have to work on (Zetzsche et al., 2017).

2.6.1 Switzerland

The Financial Market Authority (FINMA) is the Swiss regulating authority for tokens and their issuance. It first published guidelines concerning the regulatory framework of token offerings in 2018 (Financial Market Authority, 2018).

In Switzerland, token issuers themselves bear the responsibility to undertake a legal assessment of the tokens they intend to issue to comply with applicable regulations. Fundamentally, a token’s degree of regulation depends on its economic functionality and purpose, especially whether it qualifies as security (Financial Market Authority, 2018).

Security tokens and hybrid tokens qualify as securities under the Swiss Financial Market Infrastructure Act (FMIA) if they ‘are standardized certificated or uncertificated securities, derivatives and intermediated securities, which are suitable for mass standardized trading’ (Financial Market Authority, 2018, p. 4). Consequently, they are treated legally similarly to traditional securities.

Currency tokens as a means of payment are not considered securities under the FMIA and hence are not regulated under securities laws. Instead, they fall under the Anti-Money Laundering Act (AMLA). However, in the case of pre-sale issuance or pre-financing, securities laws may apply to currency tokens (Financial Market Authority, 2018).

Utility tokens are not subject to securities laws if they exclusively convey an entitlement to access digital usage or service. However, if they have an investment purpose, they are considered securities and become subject to securities laws (Financial Market Authority, 2018).

Securities laws

Although uncertificated securities are considered securities under FMIA, the book-entry of self-issued uncertificated securities is unregulated under the Stock Exchange Act (SESTA). In contrast, derivatives and intermediated securities fall under the Stock Exchange Ordinance (SESTO), resulting in an obligation to fulfill several licensing requirements, such as the statement of the business field description, registration in the commercial register, or a specification of minimal capital. Furthermore, security tokens that resemble bonds or equities may result in prospectus requirements under the Swiss Code of Obligations (Financial Market Authority, 2018).

Banking laws

Typically, funds raised in a token offering are not considered deposits as investors usually do not claim their funds back. However, if issued tokens have debt capital character (e.g., ‘promises to return capital with a guaranteed return’ (Financial Market Authority, 2018, p. 6)), the raised funds are considered deposits under the Banking Act. Hence, the issuer is required to obtain a banking license (provided no exceptions apply) (Financial Market Authority, 2018).

Collective investment laws

The Collective Investment Schemes Act comes into effect if a third party manages the funds raised through a token offering, requiring authorization from FINMA to act as such. It is designed to protect investors and ensure the functioning of investment fund products (Financial Market Authority, 2018).

Anti-money laundering regulations

‘Anyone who provides payment services or who issues or manages a means of payment is a financial intermediary and subject to the Anti-Money Laundering Act (AMLA)’ (Financial Market Authority, 2018, p. 6). Hence, the issuance of currency tokens falls under anti-money laundering regulations, while issuing utility tokens do not unless the issued utility tokens have an investment purpose. Accordingly, activities that fall under AMLA go along with due diligence requirements (Financial Market Authority, 2018).

2.6.2 Singapore

The Monetary Authority of Singapore (MAS) is the regulating instance for token offerings in Singapore. In 2017, it first released guidelines on the application of relevant laws regarding token offerings in Singapore. Fundamentally, the MAS regulates token offerings if issued tokens are considered a type of capital market product under the Securities and Futures Act (SFA). According to the SFA, types of capital market products encompass units in a collective investment scheme, derivatives contracts, spot foreign exchange contracts for purposes of leveraged foreign exchange trading, and any securities (Monetary Authority of Singapore, 2017).

Securities laws

As security tokens typically qualify as capital market product, they are treated identically to any other capital market product, including the obligation of publishing a prospectus which must be in accordance with the SFA and registered with MAS.

Token offerings may be exempted from prospectus requirements, if

1. the offering is small and does not exceed USD 5 m or its equivalent in a foreign currency within a 12-month period
2. the offering is a private placement and is made to less than 50 persons within a 12-month period
3. the offering is made to institutional investors only
4. the offering is made to accredited investors.

However, the MAS mentions that the exemptions are subject to certain conditions, including advertisement restrictions (Monetary Authority of Singapore, 2017).

The MAS stresses that intermediaries who facilitate token offerings may be required to hold licenses that allow them to act as such, unless otherwise exempt:

1. Persons who conduct a primary token offering of digital tokens that are considered capital market products must hold a capital markets services license under the SFA
2. Persons who provide financial advice regarding digital tokens that constitute capital market products must hold a financial adviser’s license under the Financial Advisors Act (FAA).
3. Persons who establish or operate trading platforms in Singapore regarding digital tokens considered capital market products must be approved by MAS as an approved exchange or recognized by MAS as a recognized market operator under the SFA.

Furthermore, the MAS provides guidelines on the extra-territoriality of the SFA and the FAA. SFA requirements apply to persons who conduct a primary token offering or operate a trading platform partly in or outside Singapore or entirely outside Singapore. FFA requirements apply to persons based overseas, engage in any activity or conduct that is intended or likely to induce the public or a section of the public in Singapore to use any financial advisory service provided by these persons (Monetary Authority of Singapore, 2017).

Anti-money laundering regulations

The MAS specifies that the Notice on Prevention of Money Laundering and Countering the Financing of Terrorism (AML/CFT requirements) applies to holders of capital market service licenses (e.g., issuers of security tokens) under the SFA (Monetary Authority of Singapore, 2017).

In January 2020, the Payment Services Act (PS Act), which addresses the regulation of currency tokens, came into effect in Singapore (Monetary Authority of Singapore, 2020). It specifies that persons who run a business providing any service of dealing in digital payment tokens or any service of facilitating the exchange of digital payment tokens are required to be licensed and will be regulated under the PS Act for AML/CFT purposes.

Additionally, the MAS emphasizes that other digital tokens that may not fall under MAS’s regulatory purview, such as utility tokens, may nonetheless be subject to AML/CFT requirements (Monetary Authority of Singapore, 2017).

2.6.3 United Kingdom

The Financial Conduct Authority (FCA), the responsible regulatory authority regarding token offerings in the United Kingdom, published guidance on tokens in January 2019. It provides a regulatory perimeter that distinguishes regulated from unregulated financial activities in the United Kingdom. For token offerings, the FCA uses a case-by-case approach to determine the type of the respective token (utility, security, or exchange token) and the resulting regulatory provisions (Financial Conduct Authority, 2019).


Excerpt out of 35 pages


A comparative study of token offering mechanisms ICOs vs. STOs
University of Frankfurt (Main)
Catalog Number
ISBN (eBook)
ISBN (Book)
ICO, Initial Coin Offering, Token Sale, Digital Currencies, Virtual Currencies, Cryptocurrencies, Blockchain, Distributed Ledger Technology, STO, Security Token Offering, Signaling, ICOs, STOs, DLT, Krypto, Token, Kryptowährung, Entrepreneurial finance, Token offering, crypto, Signaltheorie
Quote paper
Nico Dambmann (Author), 2021, A comparative study of token offering mechanisms ICOs vs. STOs, Munich, GRIN Verlag, https://www.grin.com/document/1039524


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