Disclosure Readability in Unregulated Capital Markets: Evidence from Initial Coin Offerings

Abstract

Initial coin offerings (ICOs) have emerged as a popular method to raise capital by startups. During the ICO process, issuers release white papers, which serve as the primary offering documents. Unlike traditional corporate disclosures, ICO disclosures are largely unregulated. We hypothesize that more-readable white papers reflect less information obfuscation by the issuers and are less cognitively costly for potential investors to process and understand, thus enabling the issuers to attract more funding. Utilizing a hand-collected global sample, we find that white paper readability is positively associated with the likelihood of being funded and the amount raised, and the positive association is more pronounced for ICOs that attract more attention from individual investors and for ICOs whose white papers contain fewer numbers or more jargon. Furthermore, we find ventures with more-readable white papers have better post-ICO performance. Overall, this paper enhances our understanding of disclosure readability in a burgeoning, unregulated market.

Keywords: initial coin offerings, crypto market, disclosure, readability

JEL Classification: G32, L26, M41