Companies use ICOs to raise funds for blockchain-based projects. The concept involves collecting money from taxpayers and issuing a new token in return.
While ICOs were quite successful, raising more than $20 billion in the last two years, there were also problems in the form of scams. In fact, about 80% of ICOs they are said to be scams.
The general regulatory context around the world is presented in two extremes: ICOs are prohibited and we can take China ICO ban in 2017 as an example, or countries are working to come up with regulations for securities offerings, as exemplified by LOI PACTE from France. In the middle ground, there are countries that have not yet taken a firm stand.
As a consequence of this global context, entrepreneurs were forced to resort to a new way of raising funds. There was a change at the end of 2018 to Security Token Offerings, a safer and more regulated way to raise funds. It is expected to be the top choice of 2019 for startups and investors, but its adoption may be under threat. Now, Initial Exchange Offerings (IEOs) are on the table.
What is an initial exchange offer?
An initial exchange offering, more commonly known as an IEO, is a method used to raise funds for blockchain-based projects.
It is takes place on crypto exchanges and is managed by the exchange on behalf of the startup that you intend to raise funds.
Issuers have to pay a percentage of the amount of tokens sold in addition to a listing fee to the exchange in exchange for the services.
The exchange agrees to not only sell the token during the IEO, but also to list the token after the initial sale is over. The exchange can promote the IEO since it is paid a percentage of the sales, that is, the more sales that are made, the more commission the exchange will be paid.
Buying tokens in an IEO is quite easy. Participants can create an account on the platform and make a purchase. There are no need to deal with smart contracts.
The growth of IEOs
Due to the massive success of IEOs, more and more startups are using this method to raise funds. Also, a growing number of exchanges have started offering IEO services.
The method is beneficial for everyone involved: exchanges make more profits and startups are put up for sale quickly without the hassle of laws and regulations.
Many credit Binance for the huge success of IEOs. The company launched its own IEO platform, Binance Launchpadin 2017.
The company’s CEO, Changpeng Zhao, spoke about the service:
“It’s basically an exchange, an initial sales platform where we help projects raise money[…] if it’s just at the whitepaper stage, it’s much harder for us to assess. We evaluate very strictly.”
BitTorrent was the first big name to use the platform. The company raised $7.27 million in just 15 minutes, reaching the maximum limit.
However, it didn’t take long to break the record. The second IEO on the platform, Fetch.AI, hit the $6 million cover hard in just 22 seconds.
It was over in about 10 seconds. The queue was totally full in seconds. The render is just slowly exhausting the queue. congratulations to @fetch_ai !
—CZ Binance (@cz_binance) February 25, 2019
This pushed other exchanges to create their own IEO platforms as well. Some of the most popular names today include Bitmax Launchpad, OK Jumpstart, KuCoin Spotlight, Huobi Prime, and Bittrex IEO.
The differences between IEOs and ICOs
The following table explains the main differences between the two options:
|Fundraising managed by||The exchange||startup|
|Smart contract managed by||The exchange||startup|
|automatic listing||Yes, the exchange will list the token||No, the startup must contact the exchange to get listed|
|AML/KYC required||No, it is not necessary in most cases||Yes, required in most cases|
|Assessment required||Yes, the exchange will evaluate the start-up||No, anyone can start an ICO if it is legal in the country.|
|marketing budget||Low – The exchange often trades on behalf of the startup||Yes, the startup has to spend a lot on marketing and reaching an audience.|
|Visibility||High – anyone who visits the exchange platform will know||Low – Mainly dependent on advertising efforts.|
|Rate||Yes, you must pay a listing fee and a percentage of sales to the exchange.||No, there are no fees involved, but there may be other costs|
IEOs may seem expensive on paper, since new companies have to pay a listing fee and commission, but they can be very useful in the long run.
Startups don’t have to spend a lot on marketing, as the exchange takes care of the work. In addition, IEOs benefit from the exchange’s client base.
On top of this, the startup does not have to work to get listed as that is also part of the deal.
Buyers or participants have more faith in IEOs since they are held on the exchange platform. Exchanges are known to do a thorough screening before selecting a new company, reducing the risk of scams.
A prime example of exchanges taking a stand is RAID IEO. Bittrex canceled the IEO a few hours before release due to RAID not being able to maintain a partnership with OP.GG.
Since the partnership was vital to the project, Bittrex decided to cancel the IEO to protect its customers.
Customers feel secure about payments and their information, knowing they are in safe hands. The exchange handles the entire process.
Also, many of the buyers already have accounts with the exchange, which they can use to participate in IEOs.
How expensive are IEOs?
While the overall cost changes from exchange to exchange, most charge a 20 BTC listing fee. In addition, the commission can reach 10%.
The future of IEOs
IEOs are great for business, but they still leave investors in a precarious position. There may be a lower risk of scams, but there is no guarantee of success.
For example, EXMO, which launched an IEO in Q1 2019, defines its vetting process as:
You can’t deny the fact that IEOs are a lot like ICOs, but they offer more security and trust. Along with STOs, it seems that startups and investors have limited options to raise funds. It is best not to rely solely on third parties and do your own research to check the potential of a project.