By Dr Luca Sabia, Dr Kaddijatou Manneh and Dr Esin Yoruk, the Centre for Business in Society

When I interviewed J.R. Willet (Sabia, 2018), often credited as the inventor of Initial Coin Offerings (ICOs), we were amid a bubble poised to burst. Just a few days earlier, an article by The Motley Fool (Williams, 2018) highlighted a study showing that only 4% of ICO fundraising campaigns for blockchain-based entrepreneurial projects were successful. It was 2018, and the situation eerily resembled the dot-com bubble of 2000. Today, the number of ICOs has significantly declined, with some researchers suggesting that the cycle has ended, while alternative fundraising methods for blockchain projects are emerging. So, why focus on researching this phenomenon, particularly the whitepapers – the business plans used to make promises in exchange for digital tokens? Despite scandals and broken promises – according to recent research (Sharma, 2024) 81% of ICOs conducted in 2023 ended up in a failure within a year – ICOs (and their alternatives) might still offer opportunities for democratizing entrepreneurial financing, especially for underrepresented entrepreneurs seeking to overcome equity barriers. Let’s rewind and start from the beginning:

What’s an ICO?

We are in the Web3 era, where ICOs, a subset of equity crowdfunding, represent a form of entrepreneurial financing based on blockchain technology, similar to IPOs (Initial Public Offerings). New businesses issue transferable tokens to the public in exchange for financial resources, bypassing the costs associated with a traditional IPO. This approach allows a diverse range of entrepreneurs to secure capital for their projects. However, unlike professional investors in regulated markets who benefit from established intermediaries, clear and transparent processes, and strict legal obligations, ICO investors often solely depend on information provided by entrepreneurs through the whitepaper.

The problem with the ICO whitepapers: the good, the bad and the ugly

In simple terms, a whitepaper is a written pitch that outlines the business idea, provides a roadmap for project development, and serves as a strategic tool for soliciting funding in the form of ICO. Essentially, it functions like a business plan. It should include information about the product or service, the business strategy, the team, risk management actions, and funding allocation. However, the lack of legal regulation (Guillaume and Sannajust, 2023) exacerbates information asymmetry between entrepreneurs and investors, making this investment space particularly vulnerable. Without specific regulatory requirements, entrepreneurs have significant control over what and how they communicate, potentially leading to manipulation, especially if investors are not industry experts. This situation creates a typical principal-agent problem, where the entrepreneur (the agent) can generate misleading information to attract the investor (the principal). This issue is especially pronounced when investors are less experienced and competition is intense, making it difficult to capture the attention of potential investors.

Can we do anything about it?

For this reason, we launched a research project to understand how investors navigate through marketing hype, technical jargon, and FOMO (Fear Of Missing Out). Our preliminary results indicate that the 2018 bubble burst has left a lasting impact. Not only has the number of ICO projects declined compared to the past, despite the continued attraction of billion-dollar opportunities for entrepreneurs and investors, but there is also increasing scepticism about the effectiveness of the whitepaper as a communication tool between entrepreneurs and potential investors. While an investor might be intrigued by a seemingly promising project, they may be reluctant to invest without sufficient evidence of credibility, even if the project meets their criteria.

What’s next?

Distinguishing between genuine projects and empty promises remains challenging. So, what can investors do? Well, whilst waiting for the regulator, in conducting their DYOR (acronym which stands for “Do Your Own Research”, as it’s known in crypto circles), they should look beyond the promises and the glitter, focusing on business fundamentals such as need, demand, the team, and financials. As Willet explained in his interview, “The difference between ICOs and the lottery is that the odds can be in your favour if you do your homework on ICOs, but the odds are NEVER in your favour playing the lottery. That’s a big difference!” It’s like saying, go for substance, not the glitter. DYOR is not Dior.

Guillaume, A. and A. Sannajust (2023). “ICOs after the decline: a literature review and recommendations for a sustainable development”, Venture Capital. An International Journal of Entrepreneurial Finance, 1-19.

Sabia, L. (2018). “J.R. Willett and the Future of the ICO”, https://thisisoliver.co/2018/06/15/j-r-willett-and-the-future-of-the-ico-exclusive/.

Sharma, S. (2024). “ICO failures and lessons learned”, https://sdlccorp.com/post/ico-failures-and-lessons-learned/#:~:text=According%20to%20research%20a%20staggering,year%20of%20their%20token%20sale.

Williams, S. (2018). Less Than 4% of All Initial Coin Offerings Are a Success. The Motley Fool.

Through understanding the impact of organisations’ activities, behaviours and policies, the Centre for Business in Society at Coventry University seeks to promote responsibility, to change behaviours, and to achieve better outcomes for economies, societies and the individual.

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