Credible Disclosure Signals in Unregulated Markets: Evidence from Initial Coin Offerings
As initial coin offerings (ICOs) gain popularity as a new way to raise capital for business ventures related to digital assets and blockchain technology, concerns about fraud in this less regulated market have grown. We examine whether voluntary disclosure is sufficient for investors to distinguish legitimate projects from fraudulent ones. By examining white papers that issuers make public before ICOs, we find that among various disclosure attributes revealed in traditional regulatory filings (e.g., specificity, originality, and readability), only the length of project-specific information predicts a lower likelihood of fraud. The length of non-project-specific disclosure does not. Meanwhile, investors do not fully differentiate between the two, thus allowing scam projects to obtain funding by mimicking the length of good projects by providing more non-informative disclosure. Our paper offers timely evidence on the disclosure attributes that investors can use to avoid fraud in the ICO market and adds to the on-going debate over whether and how to regulate this emerging market.