2017 saw the rise in Initial Coin Offerings and it came out as an amazing tool for startups to raise capital. But, also keep your eyes open for Initial Exchange Offering (IEO).
Slowly the world started believing this was the future of capital raising as it was quick and involved less of regulation. But soon the disadvantages started taking over advantages as the regulators began to clamp down. A lot of ICO’s, too, turned out to be scams and soon the future for the initial coin offerings became bleak and 2018 saw a big dip.
Initial Coin offering (ICO)
An Initial Coin Offering or as they call it ICO is a fundraising technique in which blockchain and crypto-based startups sell their new underlying tokens or coins, in exchange for capital usually in the form of Bitcoin or Ethereum. In layman terms, it is similar to initial public offerings or IPO’s in which investors contribute to capital by way of buying equity shares of the company.
ICOs are easy to structure because of technologies like the ERC20 Token Standard, which abstracts a lot of the development process necessary to create a new cryptographic asset. Most ICOs work by having investors send funds (usually bitcoin or ether) to a smart contract that stores the funds and distributes an equivalent value in the new token at a later point in time. Usually, without restrictions, some ICO’s do have been selective in who can participate in an ICO, assuming that the token is not, in fact, security.
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ICO’s were relatively new when they shot to fame in the blockchain and crypto community. Since their introduction, the world has had a divided view on them- while some belief ICO’s as an innovation in the traditional venture-funding model, others feel that they are just unregulated securities that allow founders to raise an unjustified amount of capital. The debate has been further intensified as most regulators around the globe too had a different view especially after a few of the ICO’s turned scams.
Enter Initial Exchange Offering (IEO)
While Initial Exchange Offering was present in 2017, it was overshadowed by the Initial Coin offerings. But with problems arising and no regulatory clarity on initial coin offerings, Initial Exchange Offerings have taken the front seat.
What is an IEO?
To explain Initial Exchange Offering, as the name suggests, is a kind of initial capital raise which is conducted on the platform of a cryptocurrency exchange. An IEO process is administered and monitored by a crypto exchange on behalf of the start-up that is trying to raise capital with its newly issued tokens which would ultimately be listed on the exchange.
As the token sale is carried out on the exchange’s IEO platforms, token issuing start-up has to bear the expense of a listing fee along with a certain pre-decided percentage of the tokens sold during the IEO. In return, exchange’s platforms allow the startups to sell their token and these coins are then listed on the exchange-listed after the IEO is over. As the cryptocurrency exchange takes a percentage of the tokens sold by the start-up, the exchange is incentivized to help with the token issuer’s marketing operations.
The participants that look to participate in the IEO, like in ICO, do not send their capital contributions to the smart contracts. Instead, their accounts are created on the exchange IEO platforms which are funded by the participants and these funds are used to buy the new tokens of the start-up which is trying to raise capital. These accounts are usually KYC compliant and have a buying cap per individual to keep the demand-supply in check.
While there are a lot of differences, IEOs are similar to ICO’s in certain aspects, but the most significant advantage of IEOs over ICO lies in the better liquidity provided by the exchange once trading starts after the IEO, since a large user base is already guaranteed.
Advantages of IEO
Trustworthy: One of the main and foremost advantages of IEO being connected to an established exchange is Trust. As the crowdsale of the new token is conducted on a cryptocurrency exchange, the exchange too screens every project and does its own set of due diligence before it allows to project to list its token on its platform. For exchanges, their name and reputation are also on the line, and they too take every step to see that there are no fake or subprime projects listed on the platform.
The best and the most recent example of this was that of Bittrex which Cancelled its Excited IEO Just Hours Before Scheduled Launch. Bittrex cryptocurrency exchange announced the reversal of its upcoming IEO scheduled to host on behalf of a South Korean Startup RAID for its XRD token. The exchange suddenly canceled it on March 14 while the IEO was supposed to go live on March 15. The reason for this reversal was the Bittrex found that there was a change that occurred in the business status of the RAID project, elaborating that OP.GG terminated its strategic partnership with RAID which was essential for RAID project.
Ready Qualified Investor base: As IEO is not open to the public and is restricted to the exchange users which in a way are already compliant with KYC/AML. This gives the project access directly to credible and the project does not need to re- KYC them.
Easier for the projects: Token issuer startups benefit from the more flawless process of launching IEOs on exchange platforms – compared to doing their ICOs “on their own.” While the fundraising organizations have to pay fees for listing and a percentage of their tokens, the exchange will help them with marketing. So, startups launching their IEOs require a lower marketing budget than if they decide to go with an ICO. Moreover, token issuers can take advantage of the exchange’s stable customer base to receive more contributions to their projects.
Listing: As token listings are also “in the deal,” it is a natural process that the cryptocurrency exchange where the IEO is conducted lists the coin of the startup after the crowdsale is over. While IEOs seems like a more secure and efficient alternative to ICOs, the costs associated with token sales can be high for startups. Listing fees can go as high as 20 BTC, while exchanges can even take a 10% cut from the tokens of the fundraising companies.
ICO vs IEO: Differences between ICO and IEO
|Fundraising is conducted at||The token issuers’ website||The platform of the exchange|
|Crowdsale Counterparty||The Project Development Team||The Cryptocurrency Exchange on whose platform the IEO is launched|
|Smart Contract Managed By||Startup Conducting Token Sale||The Cryptocurrency Exchange on whose platform the IEO is launched|
|AML/KYC needed by the token issuer||Yes, But it varies from Project to Project||No really as the exchange conduct KYC/AML compliances of its users|
|Marketing Budget||High as the project itself has to allocate a variety of resources to market its token issue||Relatively low- as the exchange does the major part of marketing|
|Initial Screening of the Project||Not really required as anyone is free to launch an ICO – only it has to be in a country where the token sale is legal||Yes- the exchange does the screening of the project as its reputation too is attached with the crowdsale of tokens|
|Automatic Token Listing||No- once the ICO is subscribed the project team approaches the exchange for listing||Yes- the exchange on whose platform the token sale is conducted is the one that lists it.|
Process of Conducting an IEO
The general process of conducting an IEO involves the following steps:
- The developers of the company first decide upon their capital requirements and begin minting its project tokens.
- Then these freshly minted tokens transfer to the selected exchange which obtains full control over them.
- The development team and the exchange team set an agreement stating the broad terms and nitty-gritty of the IEO.
- The exchange team goes through the process of reviewing and vetting the project based on the specific conditions to confirm its authenticity.
- If all seems fine to the exchange, it begins marketing the token sale.
- The exchange then accepts the application and sells the tokens to individual contributors, generally for ether.
The conditions of the agreement between the exchange and the project team include several details, namely the fixed price per token and the limit on the contribution per individual.
For the participant to contribute to an IEO, he/she
- Must set an account with an exchange to participate in an IEO.
- Including the transfer of cryptocurrency and the potential purchase of the exchange tokens.
- The purchase of tokens occurs during an IEO directly from the exchange.
Essentials for a good IEO
While any legitimate project can approach an exchange for an IEO, there are some critical factors that are considered for the IEO to successfully list itself on an exchanges platform. These include –
Solid Business Model: For an IEO to sell successfully or even get listed on an exchange platform requires a solid underlying business model. The exchange, before listing an IEO on its platforms vets the business model of the project and if it finds any glitches or wrongdoings including shortcomings in the product/market fit, they won’t want to associate themselves with it.
Development underway or already have a working product: Before a project approaches an exchange to list, it is preferable that the development of the product is already underway or already has a working product. This would help the project in getting credibility from the exchange team as the chances of project failing decrease.
Token economies and related compliance: It’s essential for any project looking for investors to have a clean website and detailed documentation (e.g., whitepapers, technical papers, token economic analysis, etc.) on how the project can succeed and why the associated token will increase in value.
A large and active community: It goes without saying, but any exchange isn’t likely to support an IEO project if the project hasn’t been able to generate substantial public interest and engagement already. This also proves that the project is transparent and is fair to its community again proving the point that the project is authentic.
Team and Advisors: The exchange definitely looks at the team running the project. It’s the experience and credibility of the team that builds the confidence in the exchange as well as the investors or contributors that the project roadmap would be completed in time. Exchanges usually dismiss projects with an under-qualified founding team.
PR and social media: Strong public relations begins with getting your project seen by as many investors and traders as possible. Publishing PR on leading fin-tech and crypto publications can also be a good bang for your buck and help expose you to new audiences.
As the excitement around ICO’s has cooled off, it looks like IEO could gain prominence as they provide a new fundraising method for blockchain projects and an extra layer of trust and security. As Exchanges themselves screen every project and select the high-quality ones to launch IEOs their chances of failure or scamming reduces significantly. However, the lack of a regulatory framework in most countries still causes uncertainties about this fundraising practice, creating the major reason for investors to shy away.
Overall, IEOs have the potential of creating a win-win scenario for the projects, exchanges, and investors. However, since the IEO is still in its infancy, all stakeholders, including the legal authorities, need to step in to actually make it big.