Have you noticed how exchange tokens have been rocketing lately? That’s because exchanges have been hosting IEOs – Initial Exchange Offerings. This is the hottest fundraising mechanism right now as it lets firms sell tokens on an exchange to raise cash. In this beginner’s guide, we’ll dive into IEOs and explain what they are, how they are used and their advantages and disadvantages over other fundraising models such as Initial Coin Offerings (ICOs).
A brief history of crypto fundraising models
The ICO model proved hugely successful for many firms during 2017 and 2018, helping to raise billions of dollars, but ICOs have now died down considerably. According to data from ICOdata.io, ICOs collectively raised over $7.8 billion during 2018, while the total 2019 ICO funding to date stands at just $153 million.
The main problem with the ICO model is that there is little to no regulation and too many projects are outright scams or money grabs. A further problem is that some projects fail to get listed on exchanges, or are delisted, and die out long before they have a chance to become established. These problems mean that ICOs have an incredibly high-risk for investors.
We’ve also seen Security Token Offerings (STOs) but now there’s an even newer model; IEOs – what are they?
What are IEOs?
IEO stands for Initial Exchange Offering and it’s the latest fundraising mechanism for crypto companies looking to raise funds. Prior to an IEO, the exchange evaluates the token and decides whether to list it. During an IEO, the exchange acts as an intermediary and the token sale is held on the exchange. Unlike ICOs where the team behind a project must approach investors directly, investors must register with the exchange holding the IEO in order to participate.
How do investors participate in IEOs?
With IEOs, investors do not need to deal with smart contracts. Instead, they register with whichever cryptocurrency exchange is facilitating the IEO and then buy the token on the exchange.
While the specific registration procedure varies between exchanges, the general process is as follows:
• Sign up for the exchange that offers the IEO.
• Fund your account with the coins or tokens accepted by the IEO, such as Bitcoin.
• Purchase IEO tokens, the exchange will send the tokens to your account.
• You can then store, withdraw or trade your IEO tokens, depending on the options.
What are the advantages of IEOs?
IEOs offer numerous advantages for investors, the teams behind new tokens and for exchanges. We’ve touched upon some of those already, but here are the main advantages of IEOs.
• Lower risk: When investors participate in an IEO, they know that the exchange is guaranteed to list the token, something that isn’t the case with an ICO.
• Trust: Assuming that exchanges do due diligence prior to launching an IEO, investors can trust that a project has been scrutinized. They must still do their own due diligence, however.
• Greater security: Large exchanges offer superior security precautions to those offered by smaller projects.
• Increased visibility: Projects that succeed in having their tokens listed on exchanges enjoy more visibility and instant access to a large pool of potential investors.
• Reduced operating costs: As IEOs are handled by the exchange, projects do not need to deal directly with KYC and AML procedures.
• Increased customer base: Facilitating an IEO can help an exchange draw new customers. These customers will potentially become repeat customers.
• Greater profits: Exchanges will make money on deposit and withdrawal fees when investors participate in IEOs.
What are the disadvantages of IEOs?
As with all fundraising mechanisms, IEOs have certain disadvantages. These include:
• Security: As IEOs are handled by an exchange, one risk is that the exchange itself is hacked, as has happened to many exchanges in the past.
• User base: As IEOs are limited to certain exchanges, this restricts access to who can participate in the IEO.
• Wallet security: Investors who participate in IEOs must use wallets managed by the exchange. This means that they don’t actually own the tokens, as the exchange manages the private keys of their wallets. Alternative wallets that can store the IEO tokens, such as software or paper wallets, may not be available until after the IEO has concluded.
How are projects chosen for IEOs?
The management of the exchange must do due diligence for the project, prior to running the IEO. They will review the team, their roadmap and progress, the idea, the market, and the community. The exchange will also consider whether the project team will agree to participate in marketing campaigns such as media, airdrops and so forth. Teams must pay a listing fee to the exchange, but this could be a percentage of the tokens sold.
How are tokens distributed?
As with ICO models, IEO token distribution rules can vary widely between projects. The options include:
• Setting a fixed price for the IEO tokens
• Setting limits on the number of tokens each investor can buy
• Setting and adjusting hard and soft caps
• Controlling when IEO sales are private or public
Which exchanges are participating in IEOs?
At present, most participating exchanges are based in Asia, however, Patoymat in the EU is also getting involved. The most active exchanges are:
• Binance Launchpad
• BitMax – MitMax Launchpad
• Bittrex International IEO
• KuCoin – KuCoin Spotlight
• OKEx – OK Jumpstart
The crypto space is full of innovation and the IEO model is only just getting started. There is plenty of time and space for this market to mature and evolve. Due to the restrictive nature of IEOs, we’ll definitely see far fewer IEOs than ICOs and that’s clearly a good thing for investors.
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