A token offering is a novel mechanism that enables firms to raise funding by issuing tokens to external investors. 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, and there is fierce competition for capital. Initial work examining token offerings predominantly provides studies focusing ICOs. 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.
Table of Contents
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
Research Objectives and Focus Areas
The primary objective of this thesis is to provide a comparative analysis of fundraising mechanisms, specifically contrasting Initial Coin Offerings (ICOs) and Security Token Offerings (STOs). The research investigates whether STOs, due to their stricter regulatory environment, signal higher firm quality and thus achieve higher funding amounts. Additionally, the study examines the role of institutional investor backing as a certification mechanism and tests the impact of initial trading volume on long-term firm success using signaling theory and information cascade phenomena.
- Comparative analysis of ICOs and STOs regarding capital raising efficiency.
- Application of signaling theory to reduce information asymmetry in token markets.
- Evaluation of institutional investor backing as a certification effect.
- Investigation of information cascades via trading volume and long-term firm performance.
- Empirical assessment of regulatory environments across major jurisdictions.
Excerpt from the Book
3.1 Asymmetric information
Information asymmetry is a prevalent problem in financial markets (Jensen and Meckling, 1976) and, therefore, a key challenge in token offerings (Fisch, 2019; Momtaz, 2019b). The following describes critical features that cause information asymmetry in token offering markets:
First, the technical environment of token offerings fosters information asymmetry (Fisch, 2019). Both firms intending to conduct a token offering, and investors are required to have an in-depth understanding of DLT, which token offerings are almost exclusively based on (Fisch, 2019; Momtaz, 2019b). In particular, firms need technical expertise to utilize DLT, while it helps investors understand a firm’s business model (Cohney et al., 2018). However, because DLT is a disruptive and novel technology, there is a significant barrier to gaining technical expertise. The absence of terminological standards for essential terms like ‘crypto assets’ or ‘tokens’ further hampers technical expertise and promotes information asymmetry. Additionally, the future development of the DLT market is uncertain (Fisch, 2019; Natarajan et al., 2017).
Second, the inconsistent regulation of token offerings promotes asymmetric information. This primarily concerns ICOs. A lack of disclosure requirements in ICOs enables firms to disclose information voluntarily (e.g., Kaal and Dell’Erba, 2018). The disclosed information may then be systematically exaggerated or even fraudulent as firms may try to receive more funding from investors by abusing their informational advantage on their firm’s quality. Furthermore, utility tokens operate in a legal grey zone and often do not offer a direct counter-value at the time of the ICO (Fisch and Momtaz, 2019). These features have attracted various market participants to scam investors (Chen and Bellavitis, 2019). By contrast, STOs are subject to stricter regulations. Securities laws require firms to disclose information fairly and truthfully to enable investors to make an informed investment decision. Hence, there is minor information asymmetry in STOs.
Summary of Chapters
1 Introduction: Introduces the research topic of token offerings (ICOs and STOs) and defines the core research problem concerning information asymmetry and signaling.
2 Institutional background: Provides a comprehensive overview of the mechanisms, processes, and regulatory frameworks governing ICOs and STOs across various jurisdictions.
3 Theory and hypotheses: Develops the theoretical foundation using signaling theory, the certification effect, and information cascades to derive testable hypotheses about fundraising success.
4 Data and variables: Details the methodology for data collection and selection, explaining the dependent, independent, and control variables used for the empirical models.
5 Empirical results: Presents descriptive statistics and the results of the OLS regression analyses for the three models, testing the proposed hypotheses.
6 Discussion and conclusion: Synthesizes the empirical findings, discusses the theoretical contributions, and addresses limitations and potential areas for future academic research.
Keywords
Initial Coin Offering, Security Token Offering, Signaling Theory, Information Asymmetry, Certification Effect, Information Cascades, Distributed Ledger Technology, Fundraising, Institutional Investors, Token Economics, Regulatory Framework, Empirical Finance, Market Efficiency, Blockchain, Smart Contracts.
Frequently Asked Questions
What is the core focus of this bachelor thesis?
The thesis focuses on a comparative study of two primary token offering mechanisms, ICOs and STOs, and how they navigate information asymmetry in financial markets.
What are the central thematic fields addressed in the study?
The study centers on entrepreneurial finance, regulation of digital assets, signaling theory, and the impact of investor behavior on firm funding.
What is the primary research goal?
The primary goal is to determine if the stricter regulation inherent in STOs leads to higher funding amounts compared to ICOs by effectively signaling quality to investors.
Which scientific methodology is utilized?
The author performs an empirical analysis using an OLS regression on a dataset comprising both ICOs and STOs, while drawing upon established financial theories like signaling and certification effects.
What topics are covered in the main section?
The main section covers the institutional definitions of token offerings, the regulatory landscape in major jurisdictions like Switzerland and the US, and the application of theoretical models to test the impact of institutional backing and trading volume.
Which keywords best characterize the work?
Keywords include Initial Coin Offering, Security Token Offering, Signaling Theory, Information Asymmetry, and Certification Effect.
Why are ICOs considered more prone to information asymmetry than STOs?
ICOs are typically less regulated, lack formal disclosure requirements, and often deal with utility tokens in a legal grey zone, whereas STOs are subject to strict securities laws requiring fair and truthful information.
Does institutional investor backing guarantee a higher funding amount for ICOs?
Contrary to the author's initial hypothesis based on finance literature, the empirical results indicate that institutional investor backing does not have a statistically significant positive effect on the funding amounts raised in the studied ICOs.
What does the study conclude about the influence of initial trading volume?
The study finds that, contrary to the theory of information cascades, high trading volume in the first week after a token's listing does not significantly affect the long-term success of the firm.
How does the author explain the insignificance of token offering types?
The author suggests that investors may not be distinguishing between ICOs and STOs in their investment decisions, or that the market perception is driven by factors beyond the mechanism itself.
- 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
