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DOI: 10.17803/1729-5920.2021.170.1.101-117
S. L. Furnari*
Trough Equity Crowdfunding Evolution
and Involution: Initial Coin Offering
and Initial Exchange Offering
Abstract. This article analyzes two of the last innovative financing instruments of the crowdfunding family: Initial
Coin Offering (ICO) and Initial Exchange Offering (IEO). Having both a potential financial nature, they will be
addressed as «sons» of Equity-based Crowdfunding (EBCF). The main scope of this paper is to show opportunities
and dangers of ICO and IEO through a comparison with EBCF. Indeed, at the end of the analysis it will be possible
to understand if ICO and IEO can be considered as positive evolution of EBCF or — at least one of them — can be
considered so dangerous to appear as a sort of «involution».
In order to answer our question, the discussion firstly focuses on EBCF, the innovative financing instrument being
one of the most important figures of the «crowdfunding family». Its importance lies in its financial nature that
makes this instrument different from the other models (meaning the donation, reward and lending). Participating
in an EBCF-campaign, indeed, lets participants become shareholders of the company they are giving money to.
So, the main pros and cons of the participation in an EBCF campaign will be disclosed. In particular, granting
easier access to capitals together with the possibility to benefit from the so-called «wisdom of the crowd»
allowed EBCF to become one of the most innovative financing tools of our age. However, these advantages need
to be mitigated with the main risks occurring during a crowdfunding campaign. These are: moral hazard and
frauds, arbitrary exclusion during pre-emptive screening by platform and, last but not least, illiquidity.
Therefore, the discussion moves to the technological advanced new entry of the crowdfunding family, meaning
ICO and IEO. In order to understand why ICO and IEO are so similar to EBCF, both the main characteristic of
these instruments will be described. With reference to ICO, first of all this article provides a brief description
of the technology that makes this innovative financing tool the advanced «son» of EBCF. Indeed, through the
launch of an ICO, a company asks the crowd a precise amount of money in exchange of a «token»: an informatic
instrument through which the participant may exercise also some financial rights towards the company. From
this point of view, an ICO-campaign is very similar to an EBCF one, lying the main difference in the technological
solutions used, the queen on those is blockchain. Furthermore, ICO characteristic will be outlined in order to
disclose its functioning — meaning the relation with blockchain and smart contracts — and the different models
of tokens.
After that, also IEO will be described. IEO could be considered one of the last variants of ICO. The main difference,
indeed, lies in the fact that IEO campaigns are not conducted in the website owned by the company but in a
specific platform, that is a crypto-asset exchange.
The exam of ICO and IEO potentialities (i.e. programmability, disintermediation and tokenization) will highlight
how ICO and IEO may solve most of the mentioned EBCF cons. This will lead to the potential consideration of ICO
and IEO as evolution of EBCF. However, also ICO and IEO cons will be highlighted (meaning lack of transparency,
not clear regulatory regime and, for IEO in particular, dangerous proximity with investors and potential conflict
of interest). From the comparison between ICO and IEO pros and cons it will be possible to discuss on if we are
really in front of two evolution of EBCF or nearer to an «involution» of this instrument, considering regulatory
solutions in order to avoid this second scenario.
© Furnari S. L., 2021
* Salvatore Luciano Furnari, Professor of the University of Rome «Tor Vergata»
Via Cracovia 50-00133 Rome, Italy
Salvatore.Furnari@leplex.it

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Keywords: financing instruments; crowdfunding; «crowdfunding family»; Initial Coin Offering (ICO); Initial
Exchange Offering (IEO); Equity-based Crowdfunding (EBCF); programmability; disintermediation; tokenization.
Cite as: Furnari S. L. Trough equity crowdfunding evolution and involution: initial coin offering and initial exchange
offering // Lex russica. — 2021. — Т. 74. — № 1. — С. 101–117. — DOI: 10.17803/1729-5920.2021.170.1.101-117.
Эволюция и инволюция акционерного краудфандинга:
первичное размещение монет и первичное биржевое предложение
Сальваторе Лучано Фурнари, профессор Римского университета «Тор Вергата»
Виа Краковия 50-00133 Рим, Италия
Salvatore.Furnari@leplex.it
Аннотация. В статье анализируются два инновационных инструмента краудфандингового финансирова-
ния: первичное размещение монет (ICO) и первичное биржевое предложение (IEO). Оба инструмента име-
ют потенциальный финансовый характер, поэтому в статье они рассматриваются как родственные механиз-
мы акционерного краудфандинга (EBCF). Основная цель данной работы заключается в том, чтобы показать
возможности и риски ICO и IEO через сравнение с EBCF. Проведенный анализ позволяет понять, можно ли
рассматривать ICO и IEO как положительную эволюцию EBCF или по крайней мере один из этих инструмен-
тов можно ли считать настолько рискованным, чтобы рассматривать его как своего рода «инволюцию».
Чтобы ответить на данный вопрос, автор в первую очередь рассматривает EBCF, инновационный ин-
струмент финансирования, который является одним из самых важных родственных видов краудфандин-
га. Его значение заключается в его финансовом характере, который отличает этот инструмент от других
моделей (а именно пожертвования, вознаграждения и кредитования). Участие в EBCF-кампании позво-
ляет участникам стать акционерами компании, которой они дают деньги. В статье раскрываются основ-
ные плюсы и минусы участия в кампании EBCF. В частности, предоставление более легкого доступа к
капиталу вместе с возможностью воспользоваться так называемой «мудростью толпы» позволило EBCF
стать одним из самых инновационных инструментов финансирования нашей эпохи. Тем не менее эти
преимущества пропадают из-за основных рисков, возникающих в процессе привлечения средств через
механизм краудфандинга. К этим рискам относятся: моральный риск и мошенничество, произвольное
исключение во время упреждающего скрининга платформой и последнее, но не менее важное — не-
ликвидность.
Далее в статье рассматриваются новые, более технологически продвинутые варианты краудфандинга, а
именно ICO и IEO. Чтобы раскрыть, почему ICO и IEO так похожи на EBCF, автор приводит основные харак-
теристики этих инструментов. Что касается ICO, в первую очередь в статье приводится краткое описание
технологии, которая делает этот инновационный инструмент финансирования передовым «дочерним
элементом» EBCF. Действительно, через запуск ICO компания просит у «толпы» конкретную сумму денег
в обмен на «токен» — информационный инструмент, с помощью которого участник может осуществлять
также некоторые финансовые права по отношению к компании. С этой точки зрения ICO-кампания очень
похожа на EBCF, отличаясь от нее в основном используемыми технологическими решениями, главным из
которых является блокчейн-технология. Кроме того, в статье дается характеристика ICO с точки зрения ее
функционирования, а именно ее связь с блокчейном и смарт-контрактами, а также различные модели
токенов.
IEO можно считать одним из новейших вариантов ICO. Основное различие между ними заключается в
том, что IEO-кампании проводятся не на сайте, принадлежащем компании, а на конкретной платформе,
а именно на бирже криптоактивов.
Изучение возможностей ICO и IEO (например, программируемость, отказ от посредничества и токени-
зация) показывает, каким образом ICO и IEO могут обойти большинство упомянутых минусов, присущих
EBCF. Это позволяет рассматривать ICO и IEO как эволюцию EBCF. В статье также рассматриваются не-
достатки ICO и IEO (нетранспарентность, неясный режим регулирования, для IEO — опасная близость с
инвесторами и потенциальный конфликт интересов). Сравнительный анализ плюсов и минусов ICO и IEO
позволяет понять, действительно ли мы находимся перед двумя эволюционными технологиями EBCF или
они ближе к «инволюции» этого инструмента, принимая во внимание регуляторные решения, которые
могут помочь избежать второго варианта.

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Furnari S. L.
Trough Equity Crowdfunding Evolution and Involution: Initial Coin Offering and Initial Exchange Offering
Ключевые слова: инструменты финансирования; краудфандинг; «краудфандинговая семья»; первона-
чальное предложение монет (ICO); первоначальное биржевое предложение (IEO); акционерный крауд-
фандинг (EBCF); программируемость; отказ от посредничества; токенизация.
Для цитирования: Furnari S. L. Trough equity crowdfunding evolution and involution: initial coin offering and
initial exchange offering [Фурнари С. Л. Эволюция и инволюция акционерного краудфандинга: первич-
ное размещение монет и первичное биржевое предложение] // Lex russica. 2021;74(1):101-117. DOI:
10.17803/1729-5920.2021.170.1.101-117. (In Eng., abstract in Russ.).
Introduction
According to the Oxford Dictionary, ‘evolution’ is
«the gradual development of something». While
the definiƟon is simple, it is not simple to recognize
when we are in front of it. But what is more diffi-
cult is to disƟnguish between posiƟve and negaƟve
evoluƟon, that is to say from ‘real’ evoluƟon and
involuƟon.
Choosing the right financing instrument is a fun-
damental acƟvity for an entrepreneur. This is true
not only from a pure economic point of view (i.e.
the amount of money that could be collected), but
also for all the potenƟal and collateral consequences
(and benefits) that may be connected to the choice.
When those consequences imply potenƟal damages
for the investors, financial authoriƟes need to take
acƟon in order to influence the company’s choice.
This is usually done forbidding the use of too dan-
gerous financing instrument or limiƟng their usage.
So, during the centuries financing instruments
has transformed, facing financial authoriƟes’ deci-
sions, evolving and «involving».
As a necessary consequence, there are some
period of Ɵme in which the real state of «in» or
«e»-voluƟon of a new financing instrument is sƟll
not clear. Indeed, while history, years and experi-
ence give us the chance to know every aspect of
tradiƟonal financing instruments, those of the new
«candidate» are not completely revealed.
This paper has the aim of parƟcipaƟng in the
highlighƟng process of revealing new finance in-
struments face. In parƟcular, it is dedicated to the
last sons of the crowdfunding family: ICO and IEO
will be analysed to the light of an already regu-
lated financing instrument as EBCF is.
EBCF: when fi nance meets Internet
As it is now well known, EBCF is an innovaƟve
financing instrument belonging to the «crowd-
funding family». This scheme differs from his
brothers (i.e. donaƟon, reward and lending crowd-
funding) because, when parƟcipaƟng in an EBCF
campaign, the parƟcipants have the chance to
become shareholders of the company they are
giving money to. From the entrepreneur point of
view, the money received (or, beƩer, collected)
represents the contribuƟon in kind for the ac-
quisiƟon of the company’s shares
1
. Concerning
the «distribuƟon» of shares, above all the other
crowdfunding schemes, EBCF is one of the most
relevant in terms of the amount of money that is
possible to collect
2
.
To briefly recap the EBCF funcƟoning, it is just
enough to remember that an EBCF campaign in-
volves the parƟcipaƟon of three subjects. The is-
suer company, the crowd of contributors and a
crowdfunding plaƞorm. The first is the creator of
the crowdfunding campaign that needs funds to
develop an entrepreneurial project. Usually, his
goal is to expand his current business, considering
that this instrument is mostly used by start-ups or
SMEs. The plaƞorm is a website that gives the pos-
sibility to the issuer to publish his idea on the web.
The crowdfunding plaƞorm is the necessary inter-
mediary that connects entrepreneurs to financers.
In the specific case of EBCF, thanks to the use of
Internet, the plaƞorm is fundamental in order to
help the issuer to reach a huge amount of people,
the «future shareholder-crowd», who send money
to help the development of the presented project
and receive back shares of the funded company.
1
However, usually the newcomer investor is not considered always as a fully-fledged partner, since the company
could establish some limitation in the participation acquired such as no voting rights.
2
A deep market analysis of alternative finance instrument, detailing the average amount of money that each
different crowdfunding scheme permits to collect, is provided by the Cambridge Center for Alternative Finance
in its last research published, such as Cambridge Centre For Alternative Finance (2016), Sustaining momentum,
the 2nd European Alternative Finance Industry Report; Cambridge Centre For Alternative Finance (2017),
Entrenching Innovation — The 4th UK Alternative Finance Industry Report; Cambridge Centre For Alternative
Finance (2017b) Hitting Stride — The Americas Alternative Finance Industry Report.

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So, the crowd, i.e. the potenƟal investor, is the
third involved subject.
Born and developed during the financial crisis,
EBCF has been a precious resource for companies,
specially start-ups and SMEs. Considering the dif-
ficulƟes of having access to other forms of financ-
ing
3
, the success of EBCF can be found in the of-
fering of disintermediaƟon — or, beƩer, «different
intermediaƟon» — in the relaƟonship between is-
suer and investors. Notwithstanding the interme-
diary is oŌen a simple website, this new form of
intermediaƟon has won where others failed. It this
way, it could have been considered cheaper and
more efficient in finding funds for companies in a
situaƟon in which most of the Ɵmes those were
refused help by banks and venture capitalists. The
plaƞorm, that is to say, a simple website easily ac-
cessible through a computer, has taken the place
of tradiƟonal financial intermediary. This brings to
the table a lot of advantages for issuers and for
investors.
Main pros and cons of using EBCF
Pros: wisdom of the crowd,
crowd parƟcipaƟon and markeƟng
The first advantage usually described is one on
the reason that brought EBCF to born and, spe-
cially, to succeed. EBCF grants an easier access to
capitals, especially for certain kind of company
(SMEs and start-ups). Indeed, immediately aŌer
the financial crisis, smaller companies found lots of
difficulƟes in having granted loans from tradiƟonal
sources such as banks; while capital markets where
too expensive for medium size companies
4
. This
forced those companies in looking for alternaƟves.
One of that was EBCF that at the same condiƟons
granted an easier access to capitals than obtaining
a loan from a bank or money from a venture capi-
tal
5
. Indeed, EBCF improves the capacity of the en-
trepreneur in finding people more interested in the
project promoted and so more willingness to fund
it. The Internet eliminates territorial limitaƟons
that usually limits or impedes the funding process
6
.
But the undiscussed biggest «social» benefit of
EBCF is the possibility to enjoy the famous «wis-
dom of the crowd»
7
. This is a sociological theory
according to which a large group’s aggregated help
that involve quanƟty esƟmaƟon, general world
knowledge or spaƟal reasoning, can be as good
as, and oŌen beƩer than, the answer given by any
single individual of the group. This mechanism is so
powerful that according to some authors may solve
most of the problem that usually affect a start-up
project (such as market validaƟon, pricing difficul-
Ɵes or markeƟng).
For example, publishing a project widely on the
web help immediately in tesƟng his future suc-
cess. From this point of view, EBCF is very useful
for market validaƟon. According to MarƟn (2012)
8
,
the crowd creates communiƟes that provide feed-
3
For a complete analysis of the macroeconomics determinants of EBCF development, please see Furnari
(2018b).
4
For a deeper analysis on how the banking sector and the financial market level of development influenced
EBCF, please see Furnari (2018b), Pp. 6–12.
5
Agrawal, Catalini, and Goldfarb (2013) P. 10.
6
Other Authors explained the success of EBCF also in light of various economic theories. For instance, Biffi
(2013) try to explain the success of crowdfunding applying the Prospectus Theory elaborated by Kahneman
and Tversky in 1979. Prospect theory is a behavioural economic theory that describes the way people choose
between probabilistic alternatives that involve risk, where the probabilities of outcomes are known. The
theory states that people make decisions based on the potential value of losses and gains rather than the
final outcome In accordance to this theory, when people have the possibility to lose little sums of money to
obtain a small chance of gaining bigger ones, they behave as risk seekers and decide to bet. The application
on crowdfunding are interesting. The investment in start-ups involves a high risk but can as well grant high
economic returns. For this reason, retail investors may decide to invest little amount of money, notwithstanding
the high probability to lose it. Conversely, in those case, venture capitalists behave as risk averse, since they
are fewer than retail investors and usually invest higher amount of money looking for more certain economic
returns. At the end of the day, according also to this theory, it is more probable that common people may
support start-ups than venture capitalists. Please see also Armour and Enriques (2017) on the influence that
herding behaviour may have on a crowdfunding campaign.
7
The term was used for the first time by Surowiecki in an article published in 2005. On this, see also Willfort and
Weber (2016), P. 215 and Nasrabadi (2015).
8
Martin (2012).

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Trough Equity Crowdfunding Evolution and Involution: Initial Coin Offering and Initial Exchange Offering
backs and responses to the entrepreneur during
the campaign. Those can be used to drive future
products to be successful on the market
9
. Indeed,
the members of the community are also the first
and so probably the future clients of the campaign
creator. Therefore, a successful campaign is impor-
tant for the fund seeker in the long-term run, be-
cause he will gain not only the money, but also his
first clients and supporters.
In addiƟon, EBCF gives the possibility to bundle
the sale of equity with other valued goods, such as
discounts for future shareholders or the possibility
to have a prototype of the product. Moreover, al-
lowing the «pre-sale» of a product on the market
let the entrepreneur to test it in order to avoids
huge investments in a future failure of that prod-
uct
10
. Here, a failure can be a chance to learn by
the errors commiƩed, thanks to the advice given
by the community. Agrawal et al. (2013) report
that crowd’s suggesƟons are oŌen taken in high
consideraƟon
11
. The company gains undeniably a
pre-market analysis at zero cost. This, co-creaƟon
and market validaƟon have an important role in
reducing the risk of failure.
Another advantage that can be reported from
crowd parƟcipaƟon is markeƟng. Each campaign
has a community that follows creator’s updates.
Most of the Ɵmes they became real «evangelist
investors» ready to spread the word within their
network so helping fund seekers reaching their
goal. They are encouraged to help the success of
the company because they have a direct interest in
the success of the campaign, owning its share. This
can vary from shares and revenues, to products or
other direct returns
12
.
Other direct possible advantages coming
from the wisdom is the possibility to expand
company’s team. The people aƩracted by the in-
vestment are usually also expert in the issuer’s
business. According to Nasrabadi A. G. (2015),
with that «expert crowd» the issuers can fulfill
an experience gap in certain fields. And if inves-
tors will not have the possibility to enter the
start-up team, they at least can send their idea
to the funding start-up. From this point of view
the crowd can be deemed as a ‘sƟmulator’ of
innovaƟon because it is composed by a variety
of people coming from different cultures. In this
regard, some Authors used the concept of Flem-
ing (2004) who developed the idea of «cross-
pollinaƟon of idea», that is to say, the bolstering
of high innovaƟon thanks to the contribuƟon of
authors of different cultures, ethniciƟes, type of
knowledge and point of view
13
.
But no advantages come without risks and the
use of EBCF involves some drawbacks for, both,
promoters and contributors.
Cons: moral hazard,
pre-empƟve screening and illiquidity
As already said, the innovaƟon of EBCF lies on
the offering of shares via the Internet. But the
web is one of the best place in which it possible
to use false informaƟon to create fake funding
campaigns
14
. This is also true thanks to the pos-
sibility for campaign creators to reach a high num-
ber of people at a very low cost. Those facts make
crowdfunding an appealing target for professional
criminals. Moreover, because each single invest-
ment is usually small and thanks to the high pos-
sibility to free-ride on investment decision of oth-
ers, individuals will not find incenƟves in making
due diligence
15
. From this point of view, the risk of
fraud is not just a potenƟal drawback for investors.
The fear of fraud and moral hazard — that is to
say when the entrepreneur does not use the funds
received as he promised — , it is a real danger for
the entrepreneur as less people will use EBCF for
this fear.
However, while acts of moral hazard are dif-
ficult to impede, the risk of fraud in EBCF can
be really reconsidered thanks to the menƟoned
«wisdom of the crowd» together with the parƟci-
paƟon of the plaƞorm in the «pre-selecƟon» of
the companies that can collect money using this
financing instrument. Indeed, Internet has a re-
9
Nasrabadi (2015), P. 208.
10
This is also possible thanks to the presence of a «particular slice» of the crowd that highly values the possibility
to have the «first» access to that kind of innovation. They are the so called «early adopters», that is to say,
people that assume the risk of buying that product only to be the first to have it.
11
This was the case for the Pebble watch as reported in Agrawal, Catalini, and Goldfarb (2013) P. 13
12
Nasrabadi (2015), P. 208.
13
Hewlett, Marshall and Sherbin (2013).
14
According to Agrawal et al. (2013), while projecting a crowdfunding campaign «it is relatively easy to use false
information and craft fraudulent pages».
15
Agrawal et al. (2013) P. 20. see also Cornell and Luzar (2014) and Furnari (2018b).

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ally good ability in maintaining transparency and
the crowd has a strong ability in recognize fraud
or, at least, in not forgeƫng it. If someone would
prepare a fake campaign in one of these big plat-
forms than it is difficult that he could escape.
The whole community, spreading the word of the
fraudulent acƟon, will not let him do something
similar again. For those reasons there were liƩle
cases of fraud in proporƟon with the number of
campaigns concluded with success
16
. In this num-
ber, in most cases all the investors received their
money back and the creator has been punished
17
.
EBCF plaƞorms parƟcipate acƟvely in the re-
ducƟon of the risk of fraud. This is usually done
through a sort of «screening» operated by the
plaƞorm, the only and necessary intermediary of
a crowdfunding operaƟon. However, in their sub-
stanƟal role of gatekeeper this screening cannot
always be considered a posiƟve aspect of EBCF,
being it also a potenƟal drawback
18
. Considering
how easy is creaƟng scams collecƟon using Inter-
net, this form of investors protecƟon is necessary,
also to avoid a damage to the plaƞorm’s image.
Become «vicƟm» of the pre-empƟve screening
made by EBCF plaƞorm is quite common. Indeed,
plaƞorms usually limit the projects that are shown
to the public. This is usually done not only by the
imposiƟon of objecƟve prerequisites but also
through arbitrary evaluaƟons.
From the noble purpose of prevenƟng users
from potenƟal scams this control may be turned
into a judgment not only on the fact that the en-
trepreneur is a cheater or not, but also on the
«potenƟality» of the campaign created. ExpecƟng
this kind of control is all but a remote possibil-
ity. Plaƞorm revenues are usually connected to
the amount collected by the entrepreneur. They
amount to a specific percentage of the money to-
tally collected — usually the 5 %. Considering that
the success of EBCF campaign are usually con-
nected with the reaching of a determined amount,
when the entrepreneur cannot reach this amount,
the plaƞorms spent internal resource for nothing,
sustaining a useless cost. So, the plaƞorm has no
interest in publishing projects with low chance to
collect money under their economic (but sƟll ar-
bitrary) evaluaƟon.
Therefore, from the iniƟal aim of prevenƟng
users from wasƟng their money, contribuƟng to
the promoƟon of blatantly unsuccessful projects,
they moved to avoid that the same plaƞorm «does
not make the best use» of internal resources with-
out this use being offset by the success of the col-
lecƟon.
This is a danger that should not be underesƟ-
mated. Indeed, it should be considered that in EBCF
plaƞorms are fundamental infrastructures. Accord-
ing to some legislaƟons, indeed, it is not possible to
start an EBCF campaign without the parƟcipaƟon
of an authorized plaƞorm on which the idea can
be published. Contrary to the risk of fraud, there
are fewer soluƟon against the barrier created by
pre-empƟve screening, considering also that usu-
ally the market for plaƞorms is an oligopoly
19
.
But the undiscussed drawback of EBCF is illi-
quidity. In comparison, indeed, illiquidity can be
considered one of the worst risk-characterisƟc
of EBCF. Generally, the illiquidity problem arises
when aŌer buying shares in a company, the buyer
is unable to easily re-sell them to have his money
back. Illiquidity can be considered an «intrinsic»
risk of EBCF because, dealing most with SMEs or
start-up shares, their shares are not admiƩed be
traded in regulated markets. Indeed, small enter-
prises usually do not have the resource to com-
plain with the necessary law obligaƟon to «go
public» and, generally, business law do not con-
sent to freely trade shares in such small companies
without the intervenƟon of a public notary or of
a public register. These characterisƟcs make this a
problem very difficult to be overcome.
Against illiquidity there are liƩle soluƟons that
could be taken or there is no soluƟon at all. One of
the reasons for the fact that the secondary market
of such instruments is sƟll underdeveloped in most
case is created by specific regulaƟons than gener-
ally provide stricter rules for transferring share in
«small» companies. In addiƟon, from a «global»
point of view, rules on the direct transfer of shares
of SMEs, without any financial intermediaƟon,
16
Actually, cases of fraud are still really few. For further information, see Cornell and Luzar (2014).
17
For instance, in Hanfree’s Case the creator, Seth Quest, was literally punished by the legal system and the
community. Not only he went bankrupt after the lawsuits for a claim of only 70$, but, as reported, he had also
real difficulties in finding a new job because of his bad reputation. For further information about the whole
story see: Markowitz (2013).
18
For a deeper analysis on the role of EBCF platform as gatekeeper please see Iovieno (2016).
19
Furnari (2018b), P. 2

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vary from country to country. This sole fact, it is
itself an unresolvable cause of illiquidity
20
.
ICO and the IEO
Technological premise to ICO and IEO
AŌer EBCF, the menƟoned evoluƟon in the
fields of financing instruments has not ended.
The launch of Bitcoin in 2009 and the spread
of the technology at the base of its funcƟoning
have introduced new and innovaƟve instruments
for companies and investors to collect and give
money. Some of its results are what today is called
ICO and IEO.
To be in a posiƟon to understand deeply its
funcƟoning, drawbacks and benefits it is impor-
tant to briefly explain some core concepts. To do,
it seems useful to spend a premise describing the
«basics» of ICO and IEO, that are: blockchain, to-
kens and smart contract. A «prepared» reader may
pass to the next paragraph.
Blockchain is a form of Distributed Ledger
Technology (DLT). It is a technology which permits
to operate a decentralized-database, that is to say
a «register» under the control of a peer-to-peer
network of parƟcipants. This database can keep
the record of the transacƟons made by the sys-
tem’s parƟcipants without the need of a unique
and central authority that manage the system. In-
deed, DLT technologies allows full disintermedia-
Ɵon, since each parƟcipant to the network, called
«node», possess a full copy of the register. Reg-
ister that, according to the most common block-
chain, can be consulted by everyone. These two
facts make DLT a transparent and cyber-secure
system. Transparent because the records of the
database and their modificaƟon in Ɵmes are eas-
ily accessible; cyber-secure, since who desires to
modify the informaƟon stored needs the approval
of (or to aƩack the PC of) the 51 % of the parƟci-
pants at the same Ɵme.
Among the informaƟon that could be stored,
one kind in parƟcular has been know with the
term «token». A token can be defined as a record
in favor of a parƟcipant that let him to be recog-
nized by the enƟty who released the token as the
holder of a precise amount and kind of right. Giv-
ing a precise definiƟon of token is not simple. So,
from a technical point of view, a token is nothing
more than a simple registraƟon in favor of the par-
Ɵcipant contained in a (usually) distributed ledger
«blockchain» register. From a fucƟonal point of
view, a token can be considered as an informaƟc
«instrument» through which the parƟcipant may
exercise a precise kind of rights towards the offer-
ing company. Those rights are, indeed, the sub-
ject of the offer it-self, that is, what an investor
will gain in buying the offered token
21
. SomeƟmes
they serve confer the access to a service provided
by the plaƞorm. In other case, they confer voƟng
or, also, economic rights. Hence, tokens are adapt-
able tools which oŌen confer, upon token holders,
some kinds of benefit, such as privileged access,
the recogniƟon of the right to a share of specific
revenue streams, or rights of parƟcipaƟon in the
plaƞorm developing process such as control on
how the amount of money collected can be spent.
In addiƟon, aŌer being issued by a company,
token can easily be sent to or exchanged with oth-
er parƟcipants.
A token is usually created by a smart contract.
Some blockchain, such as the Ethereum one, can
use the power of calculaƟon given by the parƟci-
pant to the blockchain to run a so-called virtual
machine. It can be imagined as a «big phantom
computer» created thanks to the power given by
all the computer of the parƟcipant. So, smart con-
tracts are an algorithmic sequence elaborated by
such big computer. Being the virtual machine, such
as every informaƟon recorded on the blockchain,
under the control of nobody, smart contracts ac-
quire the following important and interesƟng char-
acterisƟc that make them suitable to be used for
the execuƟon of contract from which they took
their name.
Such as every soŌware, smart contracts are
self-execuƟng; but being launched on a block-
chain, they are also unstoppable. If a smart con-
tract is programmed to perform a determined ac-
Ɵon, it will work unƟl the acƟon is completed. If a
precise mechanism to stop its funcƟoning has not
being «programmed» by the party who launched
it, nobody can stop its funcƟoning without taking
the control of the 51 % of the power of calculaƟon
alimenƟng the blockchain.
This also means that a smart contract com-
pletely lacks the human interacƟon for its execu-
Ɵon. It this way it can be used to perform obliga-
Ɵon deriving from a real contract that could be
20
For a deeper analysis on how EBCF development could be influenced by its regulation, see Furnari (2018b),
P. 12.
21
Furnari (2018a) P. 144.

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wriƩen within the smart contract it-self
22
. A con-
tract of this kind could help the managing of the
performance execuƟon since there is no need for
the interpretaƟon of the terms of the contract so
that the parƟes of the agreement do not need
to trust each other before the conclusion of the
agreement since its execuƟon its fully automated.
This principle applies parƟcularly for the collec-
Ɵon of money through the launch of an ICO. If
the collecƟon of money is managed using a smart
contract, this program will automaƟcally deliver
the token in exchange of the money received.
Just this fact lets the ICO procedure a safer way
to collect money. Finally, smart contract can be
also used by the issuer to strongly grant the right
aƩached to the token distributed. For instance, if
a token grants the access to a specific service of
the issuer, if the access is regulated with the use
of a smart contract, the buyer of the token could
be more secure that he will enjoy the service he
paid for.
So, to sum up all the informaƟc landscape of an
ICO from a funcƟonal point of view, the blockchain
is the infrastructure on which tokens are placed,
could be exchanged (using also a smart contract)
and through which the issuer can distribute tokens
to the public without any intermediaries.
ICO: crowdfunding son
IniƟal Coin Offering can be defined as the first
technological advanced «son» of crowdfunding.
Indeed, an ICO consist in collecƟon of money from
an undetermined crowd via the Internet in which
the entrepreneur gives in exchange of the money
collected a «token».
Apart from the technology use, from a proce-
dural point of view, another difference between
ICO and crowdfunding lies in the substanƟal lack of
a plaƞorm that intermediate the collecƟon. Apart
from that, seƫng up a ICO campaign is very similar
to a crowdfunding one.
A parƟcular phase of the collecƟng procedure
that is worth menƟoning (being usually absent
in a crowdfunding campaign) is the pracƟce so-
called «Airdrop». This is an alternaƟve and free
way of spreading new tokens, different from their
direct sale to parƟcipants/investors. It is a kind
of «parachute distribuƟon» because, using this
form, the issuer does not sell its tokens but gives
them for free. The main purpose of Airdrop sys-
tem is to speed up tokens diffusion, hoping they
will be used more and more, to sell the following
tokens at a more profitable price
23
. This could be
essenƟally possible thanks to the fact that, nor-
mally, token creaƟon is free of costs for the entre-
preneur
24
.
The campaign is presented to the public by the
publicaƟon of a so-called whitepaper
25
. It is a doc-
ument presenƟng ICOs scope and characterisƟcs.
Its content and structure are not fixed, but usu-
ally a big part of this document is occupied by the
technical descripƟon of the token and of the smart
contract involved in the offer. Obviously, a white-
paper lack of a controlling third party, aimed at
ensuring informaƟon flows, as happens during Ini-
Ɵal Public Offerings through an «authorized» pro-
spectus. This fact makes the disclosure process an
important step for the company. The disclosure on
company whitepaper depicts an important signal
for investors; in fact, when disclosure quality rises,
also investors trust in the project and posiƟve at-
Ɵtude does so
26
. The disclosure exercise is also
helped thanks to the use of internet. Apart from
the possibility to consult specific website which
scope is to review ICO, discussion on a specific ICO
could take place in various website or blog, most
of which are created by the same company trying
to build a community around itself.
As anƟcipated, the parƟcipant of an ICO receive
in exchange for their parƟcipaƟon a token which
can be programmed to play a wide range of roles
in the funcƟoning of the company. One of the first
and most common token classificaƟon has been
provided by Hacker and Thomale (2017) that rec-
ognize three main categories: currency (or pay-
ment), uƟlity and investment tokens
27
. In addiƟon,
22
To be more precise, they can perform the role of an «online vending machines» to highlight their basic
functioning consisting in the performance of a predetermined action in response of a precise input.
23
Gorini (2018) Pp. 48–49.
24
As will be highlighted in the next paragraphes, this fact may be harmful for the investors and the market in two
particular occasion: when tokens are used to pay for services, such as the one provided by exchanged in IEO;
and when they represent administrative right within a company.
25
Kranz, Nagel and Yoo, 2011 (2019) Pp. 4–5.
26
Jiafu, Wenxuan and Xianda (2017), Pp. 16–17.
27
Token classification is one of the most important legal issues of ICO, the legal status of ICOs depending on the
nature of tokens offered. Indeed, there is not a legal definition of tokens, so it is quite difficult to enforce them

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the classificaƟon exercise is not always simple for
the presence in the pracƟce of so-called hybrid
tokens, tokens that do not fit any of the three
tradiƟonal categories since they share the char-
acterisƟcs of two or more of them, without being
classified as an autonomous category
28
.
Currency or payment tokens
29
, usually defined
simply as «coin», are the result of the launch of
a new cryptocurrency
30
. They are used to pay for
services or to acquire other tokens. For instance,
in the Ethereum ICO, users could receive Ether in
return for Bitcoin offer. Benefiƫng from the decen-
tralized technology of the blockchain, these curren-
cies differ from fiat currencies as they are neither
cerƟfied nor supported, by central financial insƟ-
tuƟons. Notwithstanding this fact, in addiƟon to
the independence deriving from decentralizaƟon,
cryptocurrencies are sƟll characterized by transpar-
ency, traceability, security and immutability.
UƟlity tokens gives to the token-holder some
funcƟonal uƟlity, such as the right to obtain a
product or, more commonly, to access a service
(but also a simple discount on that product or on
that service)
31
.
Investment token, finally, is the archetype that
beƩer resemble a technological-advanced version
of EBCF campaign. Within this broad term, usually
it is possible to include more subcategories on the
basis of the right coffered to the holder.
Investment tokens
32
are meant as token confer-
ring to the holder some direct right vis-à-vis the
issuer company, usually divided in economic (i.e.
right to dividends) or administraƟve right (i.e. right
to vote). For this reason, according to most legisla-
Ɵons those tokens, manifesƟng a financial value,
maybe be subject to prospectus regulaƟon
33
. So
depending on the specific right conferred, within
this category it could be possible to disƟnguish
between equity, debt or, more generally, security
tokens. The terms «equity token» is used to refer
to digiƟzed version of a share; «debt token» refers
to a bond while, more generally, «security token»
to a security.
The offering of equity token, or more generally,
of security token let ICO be the cryptographic ver-
sion of EBCF.
Equity tokens, indeed, usually represent shares
of the underlying company and they work as tradi-
Ɵonal stocks since they confer administraƟve and
economic right, enƟtling to a porƟon of profits and
to the voƟng right in the issuer. They differ from
the tradiƟonal stocks in the method of recording
ownership. In fact, tradiƟonal stocks are logged
into a database and can be accompanied by a pa-
per cerƟficate; differently, equity tokens record
corporate ownership on a blockchain
34
.
Being issued aŌer an ICO, the issuance of equi-
ty tokens does not need of a plaƞorm with the ad-
through existing applicable rules or to create a new set of rules, without previously defining their nature. On
this aspect, please see Annunziata (2019), Pp. 37–38.
28
Hacker and Thomale (2017) P. 13.
29
Specifically, among the main cryptocurrencies, the best known are Bitcoin (BTC / USD), Ethereum (ETH / USD)
and Ripple (XRP / USD). Today, these cryptocurrencies present still many critical issues concerning not only the
lack of a common regulation and monetary policy, but also high volatility.
30
The term «cryptocurrency» points out the digital currencies developed with the blockchain technology, whose
cryptographic and decentralized techniques guarantee the security of transactions between the participants.
31
One of the most notorious example of utility token is Filecoin: it promoted the most successful ICO in 2017 that
collected more than $250 million. The main task of Filecoin is establishing a decentralized storage network
which taps available storage space on computers worldwide.
32
More specifically, the term security tokens could be referred to the general and traditional security asset and
they can be defined as blockchain investment products. The sales of this type of tokens recently has been
called «Security Token Offerings» (STOs). This system would allow all the functionalities and benefits that
traditional security market cannot provide for. Among these ones, STOs would enhance the ability to more
easily track the security holders of a specific security. They would also grant a functional profit and losses
distribution and allocate for security holders in public companies; moreover, STOs’ system would transfer and
liquidate securities worldwide in a more efficient manner.
33
For the difference between American and European approach to token regulation, it is possible to see Hacker P.
and Thomale C. (2017), Pp. 15–39.
34
The definition do not address the question if a token could represent share of a corporation according to a
country specific legislation. The problem in Italy has been addressed by de Luca (2019) concluding that only
Italian Società per Azioni and only under some specific condition could use token to represent the participation
in their capital.

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vantages that will be highlighted in paragraph 5.2,
allowing the realizaƟon of innovaƟve schemes of
fundraising and capital raising, enabling investors
effecƟvely become partners of the undertaking
they are giving money to. Finally, as explained in
paragraph 5.1, through the use of smart contract,
equity token can confer innovaƟve ways of exercis-
ing the received rights as never tradiƟonal stocks
have conceived before
35
.
The IEO: the ICO brother
An IniƟal Exchange Offering can be simply de-
fined as an ICO conducted on a cryptocurrency ex-
change. A cryptocurrency exchange is a plaƞorm
that let customers to buy token using fiat currency
or to do trading acƟviƟes using token. Their role is
fundamental to grant liquidity to a token issued
by a company.
Apart from this simple definiƟon, it is impor-
tant to highlight in what an IEO differ from an ICO.
Firs of all, the IEO offering is intermediated.
From the point of view of the promoƟon of the
offer, the cryptocurrency exchange performs the
same role of the crowdfunding plaƞorm. It is the
website in which an investor may find different
«investment» soluƟon. Indeed, IEO grants an im-
portant advantage to the issuer: a prepared crowd
of client/investors. Indeed, being daily used to
perform trading in tokens and cryptocurrencies,
cryptocurrency exchanges are the perfect place
not only in which a token offering can be adver-
Ɵsed, but also where the offer could take place.
The use of this intermediary grants important
advantages also for the investors. They may trust
the fact that the exchange had performed a due
diligence on the token offering, in order to avoid
fraud or scum offering. Due diligence that usually
is conducted in the first interest of the cryptocur-
rency exchange in order to avoid damages to its
image.
In addiƟon, another important characterisƟc of
an IEO consists in the fact that it helps the lisƟng
of token, thanks to the preferenƟal way given by
having the cryptocurrency exchange as a business
partner. The exchange may, also, help the issuer
from a regulatory point of view, considering that
he will carry out most of the law requirements for
the offer (such as the KYC or AML obligaƟons).
How ICO and IEO can solve EBCF drawbacks
As highlighted in paragraph 3.2, the use of EBCF
has also important risks. ICO and IEO can poten-
Ɵally solve most EBCF risks. Hence, in the following
lines we will try to show ICO and IEO advantages
on EBCF in a way to highlight how the tradiƟonal
risk related to EBCF can be solved. In parƟcular,
ICO could allow to solve crowdfunding moral haz-
ard and fraud issue, through the programmability
of blockchain technology; crowdfunding illiquidity
could be overcome through «tokenizaƟon».
Programmability
to solve moral hazard issues
Programmability means the possibility to set,
before the launch of the token offering, the
conditions regarding how the money collected
shall be spent, together with the «technical»
obligation to fulfil the «promise» given. In this way
it is possible to exercise a certain control on the
offeror and its behavior.
This can be possible thanks to the use of smart
contracts. They consent to set up before the col-
lecƟon, the condiƟons that should be fulfilled to
use the money collected that can be stored in an
account held by the smart contract itself
36
. So,
spending the fund collected by the promoter of
the offer can be subordinated to the verify of spe-
cific condiƟons set out before the launching of
the offer. For instance, it will be easy to provide
in the algorithm of the smart contract that the is-
suer have to ask the parƟcipants the permission
to draw an amount of money that is higher that
a determined amount within a specific amount of
Ɵme or aŌer having reached a determined goal.
Permission could also be given exercising a voƟng
right through the token they hold.
This connotaƟon has considerable advantages
in order to impede success of scum projects since
it allows to impose a strict control on how sums
collected in the funding campaign could be spent.
In this way ICO and IEO programmability could par-
Ɵcipate in reducing moral hazard problems, consist-
ing usually in the use of funds received in a differ-
ent way from the one promised before launching
the funding campaign. ICO and IEO can give full
35
Reed (2018).
36
Indeed, within the network a smart contract appears as an induvial agent, such as any other participant. So, it
has the possibility to held cryptocurrency and to release them according to the conditions set within its code.
For more information on this aspect, please see Furnari (2019).

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control to the contributors that may decide how
the money sent to the promoter can be spent.
Therefore, the provision of a mechanism as the
one described has also the advantage to enhance
trust in potenƟal investors that may be more will-
ing to fund a project with those guarantees. Such
mechanism ensures also from the need to look for
jurisdicƟonal ‘help’ in case of breach of the con-
tractual relaƟon between issuer and investors.
But smart contract can also be used to «pro-
gram» the ongoing business of the company, giv-
ing company shareholders or stakeholders power
to concretely parƟcipate in the business of the
company without great sacrifices for the speed of
taking important decision for the company
37
. For
instance, the use of token and smart contract can
«renew» the exercise of voƟng right. Hence, aŌer
an ICO or IEO eligible voters could receive specific
tokens, which might permit to exercise the right
to vote in more easy and secure way than tradi-
Ɵonal voƟng system. Indeed, today the operaƟvity
of the general meeƟng is slowed by the need of
physical presence of the voters in a specific place
or costly and intermediated proxy systems. Thanks
to the implementaƟon of a blockchain-based sys-
tem, shareholders can exercise their rights «from
home» and using their smartphone, having the
same guarantee regarding the not corrupƟon of
the vote given, as if they were in the same place,
voƟng by show of hands.
Companies parƟcularly interested in transpar-
ency — such as foundaƟons, associaƟons, public
companies or poliƟcal parƟes — may have the
possibility to implement systems of real-Ɵme
accounƟng. Each operaƟon involving the use of
money could be recorded with a Ɵme stamp, pre-
venƟng it from being altered ex-post and allow-
ing to be controlled if needed. Moreover, it would
be also possible to uploads firm’s enƟre financial
documents so that it could be visible in real-Ɵme
and while it is created. In this way any shareholder,
customer, lender, trade creditor, or other interest-
ed party could read it and, eventually, control it.
This will let everyone to consolidate firm’s transac-
Ɵons with an income statement and balance sheet
without relying on quarterly financial statements
arranged by the firm and its auditors, enhancing
trust in company’s data and, potenƟally, avoiding
costly auditors. Another relevant side of real-Ɵme
accounƟng deal with allowing observers to im-
mediately disƟnguish suspicious asset transfers
and other transacƟons which can be outlined as
conflicts of interests or related party transacƟons.
ImplemenƟng blockchain real-Ɵme accountability
might cope with all these problems related with
transparency, allowing also creditors to engage
real-Ɵme control against fraudulent conveyances
by managers of financially distressed firms
38
.
Having highlighted the potenƟaliƟes derived
from smart contract-based system (and its pro-
grammability characterisƟc), it is easier to under-
stand why tools like ICOs might represent the in-
novaƟon not only for the channels through which
firms finance themselves, but also for their cor-
porate governance. This technology can shape in
a beƩer way the role and the funcƟoning of man-
agement and audit organs, reducing costs and Ɵm-
ing and, in addiƟon, improving the exercise of both
shareholders and stakeholders’ rights.
Tokenization to solve illiquidity
TokenizaƟon can be defined as the operaƟon of
including something (or the right to something)
in a token in a way that transferring the token will
have the effect of transferring the control on the
good (or on the right) «tokenized». Transferring a
token is equal to exchange whatever is incorpo-
rated within it. Indeed, exchanging a token that
confer administraƟve and economic right vis-à-vis a
company reaches the same scope of trading shares
of that company.
TokenizaƟon process is possible because, above
all, blockchain and decentralized ledgers gives the
possibility to create unique version of digitalized
documents. Indeed, one of the problems of infor-
maƟc evoluƟon has always been the possibility to
copy data at no cost. This fact makes very easy to
create unauthorized copy of files and documents
and so on, requiring the parƟcipaƟon of an enor-
mous amount of (costly) intermediaries or central-
ized authoriƟes to carry on digitalized services.
The ordinary trading system is based on interme-
diaƟon, i.e. on the presence of many middlemen
that increase costs and Ɵming related to the man-
aging of the related operaƟons.
The launching of an ICO or an IEO allows to pro-
vide a secure and cheap ways to transfer the token
received aŌer the money collecƟon, without the
need to rely on an intricated numbers of interme-
diaries. Indeed, first, the token can be held by the
37
For a deep analysis of the corporate governance implication of blockchain, please see Yermack (2017).
38
Yermack (2017) Pp. 23–26.

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parƟcipants itself in its «e-wallet». So, there is no
need for depositary services that hold the token in
the name of the parƟcipant. In addiƟon, token can
be easy transferred with or without the interme-
diaƟon of an exchange service.
What is more, a stock sale on blockchain sys-
tems would be seƩled more quickly since it would
depend on the independent acƟvity of the algo-
rithm of the blockchain protocols and not in any
middlemen acƟviƟes. In this sense, nodes or min-
ers have really no discreƟon in carrying on their
acƟvity that is essenƟally based on the «lending»
of computaƟonal power. So, the technology be-
hind ICO and IEO reduces costs and Ɵmes usually
required for execuƟng and seƩling trades in secu-
riƟes.
The lower cost and faster speed of seƩlement
can make trading services accessible to SMEs that
usually could not afford the necessary costs to «go
public». They are, indeed, so costly essenƟally for
the presence of many middleman and infrastruc-
ture that only high capitalized companies can have
their shares be traded in tradiƟonal market
39
. In
this way tokenizaƟon may enhance the liquidity of
the market for share of SMEs.
Cheaper (but sƟll secure) and faster trade ex-
ecuƟon and seƩlement would directly increase li-
quidity and ease both entry and exit of sharehold-
ers with all the benefits linked to this fact such as
the promoƟon of ownership acquisiƟon by insƟtu-
Ɵons and acƟvists. Then, once investors have pur-
chased their posiƟon, they can exercise the power
of influencing firm management through threaƟng
sale, exiƟng, or through negoƟaƟon and involve-
ment in corporate voƟng, or voice. As it has been
highlighted, reducing selling costs would lead to
more emphasis on exit rights as opposed to voice
ones, thus providing a tool for owners to induce
managers to improve project selecƟon
40
.
Finally, tokenizaƟon has also the potenƟality to
solve illiquidity problems related to rules of com-
pany law of a single country. SMEs and startup in-
deed usually choose for their companies simplified
legal form that are always not allowed to have ac-
cess to trading venues or that can be transferred
only using specific ways such as acts made by a
notary
41
.
ICO and IEO cons:
technological information asymmetry
Precedent paragraphs showed how ICO and IEO
could solve two of the three EBCF drawbacks
highlighted in this paper. But ICO and IEO are not
immune from drawbacks. One of this is infor-
maƟon asymmetry caused by the intense use of
technology in those blockchain-based financing
instruments.
InformaƟon asymmetry occurs when relevant
informaƟon are not shared in a full and equita-
ble manner among the involved subjects. As con-
sequence, the fully-informed subjects can take
advantage of their posiƟon, to the detrimental
of less-informed ones. TradiƟonally this problem
involved the relaƟon between company share-
holders and its directors. ICO and IEO intense use
of technology moves the tradiƟonal problem of
informaƟon asymmetry. It regards new subjects
such as informaƟc expert, on the one end, and
‘normal’ people on the other. So, the token-buying
public, who might not deeply know the techno-
logical funcƟoning behind that specific ICO, can
only believe in founders and their spokespersons
honesty, competence and commitment. But, in
truth, only founders (and their IT) can totally know
the background and the complete funcƟoning of
the procedure on which the token it is based.
Notwithstanding the fact that the code could be
«public», only few people within the crowd will
have the necessary competence to «read» it in
the proper way. The fact that the code is public
can help reducing this risk thank to the help given
by the wisdom of the crowd, menƟoned in para-
graph 3.1.
In addiƟon, a proper regulaƟon establishing the
informaƟon that must be published or the proto-
cols that must be adopted may help the exercise
of a crowd-audiƟng. But without precise disclosure
mechanisms, today informaƟon asymmetry risks in
ICO and IEO should not be underesƟmated.
A regulatory intervenƟon to reduce the men-
Ɵoned risk could help the development of this
technology and its adopƟon by companies and in-
vestors. AdopƟon that today is sƟll limited by lack
of trust in its usage
42
. Indeed, the fear for uncer-
39
Lucantoni P. (2018).
40
Yermack (2017) Pp. 19–20.
41
For more information on this theme and how it could be addressed in Italy, please see De Luca (2019).
42
Hearing about «lack of trust» could be weird for a blockchain expert, considering the well know mantra
according to which this technology resolves the problem linked with the lack of trust between two parties
before the conclusion of a transaction. However, we mean lack of trust «in» blockchain (and so in ICO).

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tainty that is at the base of all economic acƟons
(especially those related to financial investments)
could be enhanced by the obscurity of this new
technology for «tradiƟonal investors». The fact
that the «ordinary» market is considered safer
than the cryptocurrency one, since it is guaranteed
by authorized authoriƟes and subject to specific
and strict laws, maybe be a limit to future ICO and
IEO evoluƟon. Nonetheless tradiƟonal markets are
not ruled by certainty and stability, as the events
from 2008 unƟl now sƟll prove. However, in «to-
kens markets», all risks increase since there is no
regulaƟon and no prepared authoriƟes empow-
ered to intervene. Hence, also the lack of assur-
ances by issuers enhances regulatory arbitrage and
so uncertainty in the potenƟal conflicts that might
arise in ICOs. In this stage, assurances lack should
be read in conjuncƟon with disclosure framework
and a regulatory lack.
At the end of the day, technological informa-
Ɵon asymmetry seems to be the most important
drawbacks of ICO and IEO. Considering this only
great disadvantage and their potenƟality to solve
most EBCF drawbacks, they could possibly be
defined as a real evoluƟon of EBCF. But ICO and
IEO are not equal. Therefore, a brief comparison
between these instruments may help to discuss
the possibility to consider one of them as more
dangerous that the other so that, in the future, it
could not develop for lack of usage by investors of
precise ban by most important financial regulaƟon
authoriƟes
43
.
ICO vs IEO: evolution or involution?
Money «creaƟon» and conflict of interest
The ability to «tokenize» everything is a great
advantage in a digitalized society. As highlighted
in paragraph 5.2, blockchain permits to gives
«liquidity» to everything in a secure way.
While there is no problem when the tokeni-
zaƟon regards physical assets, specific problems
arise in the liquidaƟon process of right versus
companies. Indeed, being companies «creature
of the law»
44
their creaƟon is very easy as it is
easy to provoke their winding up. Therefore, be-
cause tokenizing creates something very similar to
«money», using «right versus companies» as the
underlying asset of the token and use it as a meas-
ure of value to buy for services is a risky acƟvity.
This is true for the difficulty in recognizing to those
tokens a stable value.
Indeed, the valuaƟon and pricing process of a
token depends on the stage in which the acqui-
siƟon took place. In an ICO or in an IEO, tokens
can be offered in the primary market, where they
are bought directly from the issuer, or in the sec-
ondary market, where they could be bought from
other investors, usually using the intermediaƟon
of an exchange. In the primary market, pricing is
made by the company through a comparison with
its economic data, i.e. considering the value of the
service that the token will help to acquire or the
fracƟon of the company value that the token rep-
resents. In the secondary market, the price offered
by the investors usually depends on the price the
investors bought the token, plus or minus their
expectaƟon on the increasing or decreasing of its
value in the future. When the menƟoned pricing
process are «adulterated» the exchange of token
could be dangerous because when the bubble will
burst, investors will lose their money.
The problem of using token as money with a
«false» value is more probable to arise in IEO than
in ICO. These are the cases in which the issuer
uses the self-issued token to pay for the service
received by the cryptocurrency exchange or, im-
mediately aŌer, when those tokens are sold by the
cryptocurrency exchange in the market managed
by itself. Indeed, in these two parƟcular situaƟons,
the raƟonal pricing process can be easy adulter-
ated by situaƟon of conflict of interests.
This can easily happen because, as menƟoned,
the issuer has the power to create tokens from
nothing when they are not related to a «specific»
asset of the company. Indeed, tokens underling a
right to a service of the company (uƟlity token) or
giving some right towards the company without
any strong link with its registered capital (general
investment token) have no creaƟon limit. The is-
suer may create as much token as it wants hav-
43
The permanent ban of ICO (or linked financing instrument) is not something difficult to imagine. Indeed, in
2017 ICO where temporarily banned in China and frequently financial authorities of other country speak
about it.
44
This expression has been used in Daily Mail Case. Here the European Court of Justice denied the possibility to
transfer is registered office from the United Kingdom to the Netherlands on the ground that companies may
respect the law provided by the Member State regarding their possibility to move from a Member State to
another. For more information please see de Luca (2016), Pp. 80–81.

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ing it the control on the token that can be issued,
especially when they are not linked to its own as-
sets (such as equity of debt token). Indeed, when
a company could not offer a service anymore, it
simply goes bankrupt. While granƟng more and
addiƟonal voƟng rights has the result of diluƟng
the company share capital.
For the exchange, the evaluaƟon process can be
also adulterated in the moment in which, being the
exchange in control of the order, and so, control-
ling which order saƟsfy in a specific moment, gives
the exchange the power of deciding the selling
price. The exchange will gain a strong guarantee
that the token can be sold, be itself in the control
of who can sell when someone wants to buy.
The menƟoned situaƟons represent a danger
that is more probable to be present in IEO than in
ICO. Indeed, IEO presents a clear a risk of conflict
of interest caused by the posiƟon of power ac-
quired by the cryptocurrency exchange. But, while
it is clear that this problem need to be addressed
by regulator or by the exchange itself (consider-
ing the lack of trust that such behavior cold cause
in investors), just this major drawbacks seems too
weak to induce authoriƟes to ban its usage or to
determine investors in not invesƟng in an ICO.
This drawback, indeed, can be easy overcome.
From a regulaƟon point of view, it is probable that
financial authoriƟes will address this specific prob-
lem with regulaƟon aiming at avoiding conflict of
interest as the one that today exist in general for
intermediaries providing financial services and,
specifically, for those managing EBCF plaƞorms.
From the investors point of view, a way to gain its
trust could be the implementaƟon of smart con-
tract such the one already used by «decentralized
cryptocurrency exchange» that will decentralized
also the launch of the IEO through the crypto ex-
change.
DisintermediaƟon
to prevent arbitrary exclusion
In EBCF, plaƞorms try to reduce the risk of
fraud through a sort of «screening» operated by
the plaƞorm who assume the role of the gatekeep-
er. This entails lots of power on the plaƞorm since
he becomes the only and necessary intermediary
of a crowdfunding operaƟon. Born with the aim
to prevenƟng users from wasƟng their money and
contribuƟng to the promoƟon of blatantly unsuc-
cessful projects, however this screening cannot
always be considered a posiƟve aspect of EBCF,
being it also a serious drawback as highlighted in
paragraph 3.2. In fact, plaƞorms have full power to
limit the projects that are shown to the public, not
only by the imposiƟon of objecƟve prerequisites
but also through arbitrary (and economic) evalu-
aƟons.
Arbitrary exclusion it is not a drawback at all in
ICO. ICO prevents it with its intrinsic disintermedi-
ated nature. In fact, ICO, operaƟng on blockchain
infrastructure, ensures disintermediaƟon, since no
enƟty can manage the system and so «gatekeep-
ing» it
45
.
The same it is not true for IEO in which, as in
EBCF, the plaƞorm re-gain the gatekeeping role
and power of excluding potenƟally unsuccess-
ful projects. But asking again the quesƟon if this
drawback is enough to determine the future un-
success of this instrument, the answer could be
very similar to the one given at the end of par-
agraph 7.1. This because arbitrary exclusion is
a «drawback of an advantage» that IEO has on
ICO, that is to say the possibility to gain a previ-
ous screening of potenƟally scum projects. To
solve this «residual drawback», instead of hav-
ing specific regulaƟon addressing this aspect, it is
possible that also here, the use of decentralized
cryptocurrency exchange may solve this issue, for
instance, condiƟoning the launch of an IEO on the
plaƞorm to the previous evaluaƟon of a board of
expert, having taken technical soluƟon to gain the
desired anonymizaƟon. The adopƟon of this solu-
Ɵon could be profitable for all the stakeholders in-
volved. Indeed, this selecƟon process may induce
more trust in investors, considering the reducƟon
of potenƟal conflict of interest given by the anony-
mous evaluaƟon. From this, also the issuer could
gain a direct advantage, considering the possibility
to sell more token to an entrusted crowd of inves-
tors. The same is true for the crypto exchange that
can gain from the commission on the transacƟon
concluded.
So if it is true that ICO, disintermediaƟon per-
mits the access to finance using a decentralized
networks powered by diffuse contributors, that
do not suffer from arbitrary exclusion problems, it
is also true that too much decentralizaƟon would
45
It is also based on an encrypting algorithmic code, reinforcing the immutability and the immediate verifiability
of the transactions. Hence, this technology offers a much more resilient system, realizing a more effective
protection against the different types of fraud and entailing greater transparency without any need for
intermediation.

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not allow to prevent investors from being vicƟm
of scum or fraud. From this point of view, aŌer
having taken the right adjustment in order to lim-
it dangers of conflict of interests, IEO could be an
instrument that may gain more trust to investors.
Final remarks
The conducted analysis on the three discussed fi-
nancial instruments let us show how ICO and IEO
could both be considered two valid evoluƟon of
EBCF. Both solve two important drawbacks of EBCF
meaning that both investors and entrepreneur
have good reason to collect money using ICO and
IEO instead of the now «old» EBCF.
At the end of the day, this paper tries to shed
some light in the sƟll cloudy world of blockchain
related financing instruments. Further research
may focus their analysis on other newcomers of
this crypto-family. Some of these are known as:
Security Token Offering (STO), which promise to
finance a projects offering tokenized version of
securiƟes; and Decentralized Autonomous Ini-
Ɵal Coin Offering (DAICO), in which the project is
conducted by an Decentralized Autonomous Or-
ganizaƟon as the one created aŌer the now very
famous The DAO Case. Indeed, a comparison of
their characterisƟcs and the analysis of their risks
could help for sure the work of regulators whose
Ɵme to intervene in a complete and proper way is
going to be everyday nearer.
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Working Paper 19133 [Internet]. 2013. Available from: hƩp://www.nber.org/papers/w19133. (In Eng.)
2. Annunziata F. Speak, if you can: what are you? An alternaƟve approach to the qualificaƟon of tokens and
iniƟal coin offerings. Bocconi Legal Studies Research Paper Series Number 2636561. February 2019. 2019.
(In Eng.)
3. Armour J, Enriques L. The Promise and Perils of Crowdfunding: Between Corporate Finance and Consumer
Contracts. ECGI — Law Working Paper No. 366/2017 [Internet]. 2017. Available from: hƩps://ssrn.com/ab-
stract=3035247. (In Eng.)
4. Bellini M.Blockchain and Bitcoin: come è nata, come funziona e come cambierà la vita e gli affari la tecnologia
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Small Business Economics. 2018;50(2):239–250. (In Eng.)
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8. Cornell CJ, Luzar C. Crowdfunding Fraud: How Big is the Threat? [Internet]. 2014. Available from: hƩp://www.
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Trough Equity Crowdfunding Evolution and Involution: Initial Coin Offering and Initial Exchange Offering
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Proceedings of the 3rd Entrepreneurial Finance Conference. 2018. (In Eng.)
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E. Corapi, R. Lener. I diversi seƩori del fintech. CEDAM, Milano; 2019. (In It.)
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R. Lener. Fintech: DiriƩo, Tecnologia e Finanza. I Quaderni di Minerva Bancaria. 2018. (In It.)
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Law. Oxford Business Law Blog. 2017. (In Eng.)
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(In Eng.)
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Finance Working Paper № 564/2018, European Corporate Governance InsƟtute (ECGI). 2018. (In Eng.)
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tunitense. DII. 2016;1. (In It.)
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Business School. 2017. (In Eng.)
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