Cheap Singaling in Initial Coin Offerings - The Impact of Cheap Signals on ICO Funding Amount

Abstract: Initial Coin Offerings (ICOs) is a fundraising model that enables blockchain startups to raise amount of capital close to IPOs at a fraction of the cost. ICOs are decentralized, with no single authority governing them. In this largely unregulated environment, investors often have to rely on unaudited information provided by ventures themselves. Some ICOs have yielded massive returns for investors, while others have failed or turned out to be fraud. This study builds on signaling theory and aims to examine signals of venture quality that entrepreneurs send to investors in ICOs. More specifically, I examine whether cheap signals have an effect on funding amount in completed ICOs. Using a global sample of 168 ICOs, I find that cheap signals of project elaboration and social media have a positive effect on funding amount. These results implicate that ICO markets might behave differently than other more mature markets and challenge the assumption that signals must be costly in order to create separating equilibrium. Since cheap signals do not require costly efforts for ventures, they could potentially be exploited by ICOs in order to influence their funding success. I argue that my findings provide insights for a regulatory debate as well as new perspectives on mechanisms underlying signaling theory, opening up for further research.