The meteoric growth of Initial Coin Offering (ICO) in 2017 has garnered tremendous attention and has led several cryptocurrency and blockchain projects to flourish through a decentralized way of fundraising. However, due to the increased rate of ICOs being identified as scams and various fraudulent schemes coming to the surface, the industry has witnessed a massive downturn bringing forth a surge of skepticisms and scrutinies around both ICO’s regulatory and crowdfunding future. As a result, investors are now starting to be more heedful and moving towards a new way to raise funds called Initial Exchange Offering (IEO).
Fundamentally, Initial Exchange Offering (IEO) is an ICO backed by a third party (an exchange) with a new layer of standards and regulations in an attempt to ensure quality projects. Contrary to the traditional ICOs where fundraising is being conducted on the token issuer’s website, IEO is a token sale hold on the platform of cryptocurrency exchanges in favor of the startup looking to raise capital with its newly issued token. Consequently, the trusted exchange acts as a fundraising medium and a safe intermediary conducting the sale where a pool of developers can launch and sell their projects while giving the investors a strong sense of confidence in participating to a more reliable token offering. In return, the token issuer will have to pay the exchange a listing fee along with the percentage of the tokens sold during the crowdfunding campaign.
Offering a safer playing field, IEO presents potential merits for the three primary sale participants: exchanges, token issuers, and investors. For exchanges, they get to turn a profit from the listing fees and a percentage of tokens sold during IEO. Exchanges can also increase the volume of transactions on their platform from the new listing and increase their user base with a reduced acquisition cost from crypto enthusiasts who want to participate in the IEO. However, exchanges assume reputational risk by directly hosting IEO’s on their respective platforms. Hence, they have to do a lot of the vetting process with token issuers to ensure the viability and credibility of the project.
On the other hand, token issuers can be assured of a more legitimized token sale, as well as take advantage of the exchanges’ stable customer base to participate in the crowdfunding process. In addition, a startup doing IEOs won’t have to invest too much on marketing campaigns as exchanges will actively do it on startup’s behalf with their established range of marketing strategies. And while cryptocurrency exchanges handle IEO’s smart contract and KYC/AML process to ensure crowdsale security, token issuers can save operational funds and benefit from the more flawless process of launching IEOs along with guaranteed liquidity from instant exchange listing after the token sale.
Meanwhile, investors have their own host of benefits. IEOs provide investors easy access to new and upcoming cryptocurrency projects and present a more flexible buy-in option for investors to trade tokens easily such as fiat, BTC, or even other altcoins. And since fundraising is officially backed by exchange and not the token provider, investors will get to lower the risk of losing their funds to scammers which has been a major issue in ICO process.
At present, an increasing number of cryptocurrency exchanges are joining the growing trend of IEOs and more will continue to enter the fold. Among the IEO platforms are Binance Launchpad, Bittrex International IEO, Bitmax Launchpad, Huobi Prime, KuCoin Spotlight, and OKEX IEO. With “trust” as its main advantage, IEO is heading the path to a better market and can even create a fundraising boom as the overall investment landscape transitions into a more mature ecosystem.
However, although exchanges are offering resources and industry knowledge, and vouching their reputation in an attempt to remedy several issues inherent in traditional ICOs, investors must continue to be more discerning and not throw in money without understanding the IEO’s fundamentals, for a level of risk to all parties remains. Initial Exchange Offering’s legality does not guarantee legitimacy nor the token’s long-term value in the crypto-market. Thus, investors must do their own research and do not just rely on intermediaries in choosing a worthy project to invest in.