ICO vs. Equity Financing Under Imperfect, Complex and Asymmetric Information

Abstract

This paper offers a model of a firm that raises funds for financing an innovative business project and chooses between ICO (initial coin offering) and equity financing. The model is based on information problems associated with both ICO and equity financing well documented in literature. The model provides several implications that have not yet been tested. For example we find that the message complexity can be benefitial for firms conducting ICOs. Also high-quality projects can use ICO as a signal of quality. Thirdly the average size of projects undertaking equity financing is larger than that of firms conducting ICO.

Keywords: asymmetric information, complex information, initial coin offering (ICO), equity financing, signalling

JEL Classification: D82, G32, L11, L26, M13