1. What is an Initial Exchange Offer?
In 2018, an alternative to the ICO appeared – Initial Exchange Offerings (IEO). The main difference between these methods of attracting investment lies in the key role of the exchange, which is engaged in the selection of promising and viable, in its opinion, projects.
In an ICO, tokens may be listed on the exchange not immediately, but several months after the completion of the tokensale. In the case of IEO, the exchange is initially the key partner of the organizer of the alternative tokensale. So, the latter issues tokens and sends them to the exchange. The exchange, in turn, distributes the digital assets to interested investors who are verified users of the trading floor.
Instead of sending funds to a smart contract as an ICO investor is used to, an IEO participant needs to register (and, as a rule, be verified) with the exchange, transfer funds to an account and, after the start of the token sale, purchase the coins directly from the exchange.
The agreement between the exchange and the IEO organizer may contain different terms: maximum volume of token sales per investor, predetermined asset price, hardcap and softcap, percentage of sales and fixed amount of funds for the trading floor, distribution of marketing costs, etc.
2. Why do we need IEOs when we have ICOs?
The field of initial coin offerings (ICOs) has grown rapidly over the past few years, but by the end of 2018 it had almost exhausted itself. The reasons for this are legal uncertainty, the emergence of many pacifier projects, fraud by token-sale organizers, the lack of mechanisms to protect investors’ rights, and the tightening of measures by financial regulators.
It is possible that the improved method of fundraising will be a natural result of the evolution of initial coin offerings and will repeat their success, restoring trust in tokenseals.
3. How are IEOs attractive to investors?
The exchange takes on the due diligence of projects, assessing their investment attractiveness, the viability of the developed products, risks, financial condition, market position, etc. The fact that a trading floor takes reputational risks increases the level of investor confidence.
Increasingly, ICOs are replacing private coin offerings, which are mainly available only to large investors. IEOs democratize the process of investing in digital assets, making it accessible to a wide range of participants.
If the exchange on which the IEO is held is centralized, then the possibility of so-called “gas wars” is eliminated. This is a situation where Ethereum-sending tokensale participants compete with each other by setting high gas limits. This is done to increase the speed of transactions and to be the first to acquire the coveted tokens.
4. What are the benefits of IEO for exchanges and organizers?
The main advantage of this approach for organizers is the ready base of potential IEO participants from the huge number of exchange users. This reduces the cost of marketing.
In addition, not only exchanger, but also IEO organizers are engaged in marketing. This approach not only saves money, but also creates a synergy effect, increasing the efficiency of token promotion to the market.
The main source of income of exchanges is trading commissions. More users and coins in the listing – more transactions and, accordingly, higher income from commissions. Conducting IEO on their own platform gives exchanges an opportunity to attract new users and offer, sometimes, exclusive coins that are not available on other platforms. All this increases trading turnover and, consequently, income.
In the case of an ICO, listing on an exchange is the next logical step after the completion of tokenization. The listing procedure is often costly and time-consuming. There is no guarantee that a coin will quickly end up on a popular exchange and become liquid.
IEO essentially streamlines the process of getting a token onto a trading floor. The asset becomes more or less liquid almost immediately after the end of the campaign, as it is usually listed on a major exchange.
This method of raising funds is mutually beneficial for both exchanges and token issuers. Despite the seemingly significant costs to the organizers, IEOs increase the chances of project success in the long run.
5. What are the disadvantages of IEO?
Nothing in the world is free – token issuers will have to pay a lot of listing fees anyway, which can vary from exchange to exchange. Also, the trading floor may require some percentage of the total amount of funds raised.
The main costs of marketing fall on the shoulders of startups that distribute tokens through IEO. These costs are not small, their total amount can easily reach $100 thousand or more.
Exchange staff must consist of qualified and technically savvy analysts, who are able to competently and systematically assess the long-term potential of projects and the viability of their business models. This can imply high labor costs. If the campaign fails, the exchange bears significant reputational risks.
Only the holder of a verified account on the exchange can participate in IEO, not anyone who wants to. In addition, most exchanges are centralized platforms. Users have to entrust their blockchain assets to a third party, which is associated with the risks of crashes and hacker attacks.
Overall, some experts believe that amid widespread legal uncertainty, the IEO model is only a temporary alternative to ICOs.
6. How to become a member of IEO?
First, you need to make sure that a project is really conducting an IEO and not an ICO. After that you should find out on which exchanges the IEO is held.
Having chosen the appropriate exchange, you need to create an account on it and pass the KYC (“Know Your Client”) procedure.
Also it is necessary to know, what cryptocurrencies accepts the IEO-project and put them on your exchange account. Then all that remains is to wait for tokenseal to start and finally purchase the new assets directly on the exchange.
7. Which exchanges conduct IEOs?
We recently learned that the largest cryptocurrency exchange, Binance, is relaunching its Launchpad tokensale platform. This platform was originally launched in August 2017. It hosted BREAD ($6 million) and GIFTO ($3.4 million) IEO tokensales in seconds.
Now Launchpad is preparing to launch tokenseals of BitTorrent and Fetch.AI projects. Overall, Binance promises to hold at least one IEO each month in 2019.
In addition, the Paraguayan authorities are planning to hold an IEO together with the South Korean company Commons Foundation. The funds are raised to build the “world’s largest” data center for mining cryptocurrencies. Commons Foundation promises to pay investors in MicroBitcoin tokens 30% of profits from mining and 70% of daily profits from the crypto exchange.