Businesses use ICOs to raise funds for blockchain based projects. The concept involves collecting money from contributors and issuing a new token in return.
While ICOs were quite successful, collecting over $20 billion in the last two years, there were also problems in the form of scams. In fact, about 80% of ICOs are said to be scams.
The overall regulatory context around the world is presented on two extremes – either ICOs are banned, and we can take China’s 2017 ICO ban as an example, or countries are working to come up with regulations for security offerings, as exemplified by France’s LOI PACTE. On the middle ground, there are the countries that haven’t taken a firm stance yet.
In consequence of this global context, entrepreneurs were forced to turn to a new way of collecting funds. There was a shift at the end of 2018 to Security Tokens Offerings, a more secure and regulated way to raise funds. Expected to be 2019’s primary choice by start-ups and investors, its adoption may be threatened. Now, Initial Exchange Offerings (IEOs) is on the table.
What is an Initial Exchange Offering?
An Initial Exchange Offering, more commonly known as an IEO, is a method used to collect funds for blockchain-based projects.
It’s conducted on crypto exchanges and is administered by the exchange on behalf of the start-up that intends to raise funds.
Issuers have to pay a percentage of the number of tokens sold in addition to a listing fee to the exchange in return for the services.
The exchange agrees not only to sell the token during the IEO but also to list the token after the initial sale is over. The exchange may promote the IEO as it gets paid a percentage of the sales, i.e., the more sales made, the more commission will be paid to the exchange.
Buying tokens in an IEO is quite easy. Participants can make an account on the platform and make a purchase. There is no need to deal with smart contracts.
The Growth of IEOs
Due to the massive success of IEOs, more and more start-ups are now using this method to raise funds. Plus, a growing number of exchanges have started to offer IEO services.
The method is beneficial for everyone involved – exchanges get to earn more, and start-ups get to 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 Launchpad, in 2017.
The company’s CEO, Changpeng Zhao, spoke about the service:
“It’s basically an exchange, an initial sales platform where we help projects to raise money[…] if you are just at the white paper stage, then that’s a lot harder for us to evaluate. We do evaluate very strictly.”
BitTorrent was the first big name to use the platform. The company raised $7.27 million in just 15 minutes, hitting the hard cap.
However, it didn’t take too long to break the record. The second IEO on the platform, Fetch.AI, hit the $6 million hard cap in only 22 seconds.
It was over in a about 10 seconds. The queue was totally packed within seconds. The processing is just draining the queue slowly. Congrats to @fetch_ai !
— CZ Binance (@cz_binance) February 25, 2019
This pushed other exchanges to also come up with their own IEO platforms. 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 table below explains all the major differences between the two options:
|Fundraising Handled By||The Exchange||The Startup|
|Smart Contract Handled By||The Exchange||The Start-up|
|Automatic Listing||Yes – the exchange will list the token||No – the start-up must get in touch with the exchange for listing|
|AML/KYC Needed||No – not needed in most cases||Yes – required in most cases|
|Screening Required||Yes – the exchange will screen the start-up||No – anyone can start an ICO if it’s legal in the country|
|Marketing Budget||Low – the exchange often markets on behalf of the start-up||Yes – the start-up has to spend heavily on marketing and reaching an audience|
|Visibility||High – Anyone visiting the exchange platform will know about it||Low – depends mostly on advertising efforts|
|Fees||Yes – have to pay a listing fee and a percentage of sales to the exchange||No – there are no commissions involved, but there may be other expenses|
Benefits of IEOS
Easier for Start-ups
IEOs may look expensive on paper as start-ups have to pay a listing fee and commission, but it can be very helpful in the long-run.
Start-ups do not have to spend much on marketing as the exchange handles the job. Plus, IEOs get to benefit from the exchange’s customers base.
In addition to this, the start-up does not have to work on getting listed as it’s also a part of the deal.
Buyers or participants have more faith in IEOs as they are conducted on the exchange platform. Exchanges are known to perform heavy screening before selecting a start-up, reducing the risk of scams.
An excellent example of exchanges taking a stand is the RAID IEO. Bittrex cancelled the IEO a few hours before launch due to RAID’s failure 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 regarding payments and their information as they know they are in safe hands. The exchange handles the entire process.
Plus, many of the buyers already have accounts with the exchange, which they may be able to use to take part in IEOs.
How Expensive Are IEOs?
While the overall cost changes from exchange to exchange, most charge a listing fee of 20 BTCs. Plus, the commission can be as high as 10%.
The Future of IEOs
IEOs are great for business, but they still leave investors in a precarious position. There might be a lower risk of scams, but there is no guarantee of success.
For example, EXMO, which launched an IEO in the first quarter of 2019, defines its vetting process as:
You cannot deny the fact that IEOs look very similar to ICOs, but they do offer more security and trust. Alongside STOs, it seems as if start-ups and investors aren’t limited in options to raise funds. It’s best to not rely solely on third-parties and to do your own research to check the potential of a project.