Initial Exchange Offerings (IEO) have been catching the interest of many – from traders to venture capitalists and even exchanges after the Initial Coin Offering (ICO) trend cooled off. In fact, the number of IEO projects skyrocketed from just over a dozen in 2017 to more than 100 in 2019. Amongst these countries leading this trend is Singapore which has launched 28 IEO projects, accounting for almost 25% of the overall number of IEO projects [InWara].
What are ICO and IEO?
Initial Coin Offering (ICO)
ICO was once a prefered avenue of fundraising for startups. This was done by offering the sale of the digital coin on their website where interested investors will make the purchase directly from the issuer. As ICOs are undertaken by start-ups themselves, the cost of listing was usually absorbed by the issuers. This cost did not provide much deterrence to issuers as it helped cryptocurrency companies raise nearly $29 billion since 2016. However, due to a crackdown by the US Securities and Exchange Commission for fraudulent and illegal offerings offered, this number has dropped drastically since its peak.
Initial Exchange Offerings (IEO)
IEO bears a similar objective as ICO, which is to raise funds by offering digital tokens to a large group of investors but the similarity ends there. IEO is known as the “gatekeeper”, performing functions such as investor screening known as know-your-customer (KYC), handling of the marketing activities with regard to the digital currency and follow through for the sale process of the digital asset to investors. As the limit on the amount of tokens that can be bought at IEOs are usually capped at $20,000, this has prevented certain investors from monopolising and potentially controlling the prices. This form of control is a great boost to IEO and further enhances the attractiveness of IEOs to retail investors.
IEOs are also different from ICO in the way the cryptocurrency is launched and managed by the existing cryptocurrency exchange rather than the digital currency’s management team.
In 2020, experts predict the decline in the attractiveness of IEOs amid the increasing pressure on exchanges to conduct profitable offerings. It is noted that IEOs collectively raised over $1.5 billion in the first six months of 2019. This changed drastically in the following months of 2019 as there was just one IEO on these platforms across each of the month between September to December 2019. Hopes of IEOs being more robust and attractive are present, with promising hopes that IEO’s quality will improve as well. An example is Coinbit, a consulting company that invests in payment gateways and strategic industries with a focus to raise funds towards building crypto exchanges, mobile apps and money transfer service, as well as the rolling out of bitcoin ATMs all across Europe.
Understanding the Pros and Cons
The central idea behind IEOs is to make crowdfunding even more reliable and secure than ICO as both have a limited amount of coins offered for a fixed price, with limits placed on the minimum and maximum tokens available for purchase by a single user and dedicated accepted cryptocurrencies.Therefore, a successful IEO can be an all-win situation for token issuers, users and trading platforms. So, what are the pros and cons of IEOs and ICOs?
Increased investor confidence
Trust – one of the main advantages of IEO as investors deal directly with the exchanges and not with the cryptocurreny’s project team. Due to the stringent check in place, projects that are listed can be guaranteed a certain feasibility of the project’s goals thus decreasing the possibility that the project would fail.
Guaranteed exchange listings
The goal of the exchanges is to protect its clients which is why the IEO exchanges are required to bring their own token-holders to ease the search of potential investors. As a result, users can guarantee quick and free listings after the token-sale is completed, thus saving cost and time.
Seamless and lucrative process
Regardless of an individual’s experience in the crypto space, the ease of participation on IEO platforms ensures accessibility even for novice investors. A wide range of resources are also available online for novice users who are looking to tap on IEO platforms to raise funds.The draw towards IEO platforms has been accelerated by some of the successful cases like BitTorrent and Fetch.AI in January 2020 – bringing in $7.2 million in 15 minutes and $6 million in 22 seconds respectively.
Safe and secure
Every participant is required to undergo the KYC screening process for verification so as to minimise the disappearance of the participant after the collection of funds. Hence, users can focus on executing their project right away. IEO also provides the benefits for the exchanges when new users sign up to purchase and trade the tokens, creating an enhanced marketing for the project.
The process of IEO may sound promising, but it is also subject to the following risks and limitations:
Budget requirements for IEOs
Many owners believe that their projects can be listed at any exchange and start fundraising immediately. But it is important to note that IEO is a service that goes from the exchange to the company, and token issuers will have to pay fees for listing and a cut of the tokens sold through IEO.
Strict criteria before participating in IEOs
Exchanges need to maintain their profits and establish their reputation. To achieve these, they would need to ensure that the companies participating in the IEO must create value on top of raising funds. Any failure to do so will result in the exchanges withdrawing their funds.
The Key to a Successful IEO
IEO is an exciting new fundraising mechanism and has attracted a lot of attention. But this process is not as easy as it seems as every IEO platform has its own set of rules and regulations. If you want your project to succeed, it is best to consult an expert like Desfran.With a global team built on in-depth knowledge in the crypto space, including IEO, we are able to provide professional advice to ensure your project’s success. Contact Desfran today.
Report: Asian countries top the Initial Exchange Offering (IEO) Space, Datadriveninvestor.com
Initial Exchange Report, Inwara.com [PDF]
Crypto Fundraising Is Changing Again in 2020, Bitcoin.com
Explainer: Initial exchange offerings flourish in the crypto market, Reuters.com
Why go for IEO. Pros and Cons, Medium.com
What Is An Initial Exchange Offering (IEO), Cryptonews.com
Bitcoin is up 20% so far this year and one expert predicts it could hit $16,000 by year end, cnbc.com
What Is an Initial Exchange Offering (IEO) and How It Differs From ICO?, Cryptopotato.com