ICOs have been described by market participants as “crowdfunding on the blockchain”. Indeed, ICOs with tokens used as a means of exchange for the future use of a product/service that is yet to be developed are similar to reward-based crowdfunding, as in both cases the companies24 pre-sell a product or service that remains to be built. Reward-
based crowdfunding offers non-pecuniary tangible (e.g., product) or intangible (e.g., reputation, identity) rewards in exchange for funding (Lambert & Schwienbacher, 2010).
Comparing equity-based crowdfunding to ICO offerings is less straight-forward, given that the majority of ICOs do not confer equity ownership or participation in future revenue streams of the issuing company.25 While the decision of investors to invest in equity crowdfunding is purely driven by financial return motivations, investors pledging funds for rewards-based crowdfunding can have non-financial motives such as an interest in receiving rewards, their willingness to support ideas or be a part of a community.
Both financing mechanisms are based on technology and online payment systems to facilitate transactions, and both are suitable for seed and early-stage financing of start-ups. In the case of crowdfunding, products or services tend to be in a more advanced stage of development, with at least a prototype in place when the campaign is launched, compared against ICOs which are mostly at concept level at the time of the offering.
In addition to raising funds, both financing mechanisms aim to incentivize early product adoption and the formation of a community around their project. It can be safely assumed that, given the nature of distributed ledger technologies, network effects of ICOs are more important than the ones present in crowdfunding campaigns.
Unlike crowdfunding, where an online crowdfunding platform (Kickstarter, RocketHub) is required for the campaign to be launched, ICOs do not rely on an intermediary. Intermediaries are replaced by the blockchain, removing the corresponding costs of intermediation and benefitting from efficiencies generated by the use of DLTs. At the same time, other costs involved in ICOs, such as listing costs, are non-existent in crowdfunding. Although both structures involve small ticket investments, the ultimate size of fundraising tends to be larger in ICOs, and thus any cost comparison between the two financing mechanisms may be misleading given the difference in their respective funding sizes.26
Another important difference lies in the pricing of the products. A company launching a crowdfunding campaign allowing for the pre-purchase of its product has to define in advance the price of the product. In ICOs, there is no price commitment as to the price of its future services (Agrawal et al., 2013, Catalini and Gans, 2018).
Another important parameter in that crowdfunding platforms have vested interest to select credible projects for the campaigns they list, given the reputational risk involved for the platform. The only reputational risk involved in ICOs is the one of entrepreneurs themselves as no vetting by an independent agent with aligned interests is performed.
The vested interest of the crowdfunding platform has implications in the disclosure of offerings. In the event of an ICO offering without specific disclosure requirements, the ICO whitepaper contents may be published without any prior due diligence or validation by a third party. On the other hand, the vested interest of the crowdfunding platform to ensure its credibility implies a minimum control in the contents of crowdfunding disclosure to ensure the quality of documentation.
Importantly, both crowdfunding and ICO offerings reach a much wider investor base, allowing retail investors to participate in the financing of SMEs and start-ups. In the current form of ICOs and particularly when the offering is not regulated, there is no restriction in the profile of the potential investor. In the case of crowdfunding, and depending on the jurisdiction, restrictions may apply on the pool of potential investors. In the US, the statutory “accredited investor” definition takes into account financial status under net worth/net income tests or educational/professional expertise, as verified by certain regulatory authorities.
