Is the initial exchange offering, or IEO, the new form of fundraising? Like the initial coin offering before them, they have attracted the blockchain world’s attention. But are they really a sound alternative? In this post, I’ll dive into the technical, fundraising, business, security, and legal aspects of the token offering. Here’s what you need to know about IEOs.
Short for initial exchange offering, the IEO is one of the newest ways for blockchain startups to raise initial funds. But how do they work? Promising to avert some of the worst of the ICO phase, IEOs involve exchanges directly instead of inadvisable methods such as the token airdrop to distribute tokens. First, a startup sells tokens for users to spend as an internal currency or as a voucher to access their platform, and any discounts, services or products. The entire process depends on the demand for the new token, which funds the first stages of startup development.
Key to this model is that startups don’t sell tokens themselves, but rather collaborate with cryptocurrency exchanges who organize and execute the token sale. Exchanges such as Chinese exchange ZB.com are established companies with existing customers, so they can handle the promotion of the sale and secure customer accounts. Normally traders can immediately trade their tokens processing time has finished, but sometimes there are vesting periods for tokens – they are held for a certain time. Considering that IEO is mostly based on tokens with solely a utility/ payment function, rather than security features (for example, share participation in a company), trading tokens is a method to grant liquidity for the platform, rather than an investment in a traditional and legal sense of the word.
1. Technical aspects
To explore the technical aspects of IEO, I decided to consult my colleague Marcin Rzetecki, blockchain consultant at Espeo Software and vice-president of the Blockchain Polska Association (in Polish). He is well-known for his vast experience in IT and extensive knowledge of digital currencies.
According to Marcin, IEOs are presently the best way to raise money, especially compared to the ICO and STO. ICOs have lost people’s trust in the last months, as many of ICO-based projects were announced as scams or failures. The IEO is a breath of fresh air in his opinion and has several success stories to prove its credibility, such as BitTorrent, Celer Network and Matic Network, all of which have achieved success on Binance through an IEO. When asked about pioneers in cryptocurrency exchange, Marcin pointed out that, “there is no other exchange that has done its own blockchain, but Binance has achieved it. They have also made their own successful token — Binance coin. It allows you to spend it on the Binance platform.”
Regarding technical aspects of IEOs, Marcin said, “investors don’t take much interest in a technical approach. For them, the new form of fundraising should be safer than before. I think Binance found the best solution. They have the entire ecosystem to the IEO such as its own blockchain, its own cryptocurrency, and proven publication processes for new projects. Generally, with Binance, things would be the easiest way on the technical background.”
Theory aside starting an IEO is roughly similar to the ICO. Creating a solid business foundation, therefore, is the biggest challenge to tackle. Sylwia Rogowicz, Lead project manager and co-founder of Espeo Software, shared what she believes will make IEO projects successful.
“An excellent business model described in the white paper and well-prepared tokenomics [are essential],” she said. “From a technical perspective, both the token and the sale are prepared according to the business model, so it must be of great quality.”
Meanwhile, Hakan Atabaş, founder of Geliyoo (in Turkish) cites IEOs as a safe method of exchange and recommended it for startups. Of course, cost is something every startup wants to know. One downside to the IEO is the cost. The fees charged by exchange companies can range from $250,000 to $400,000 USD, according to Hakan.
2. Fundraising aspects
After covering the technical aspects of IEOs, let’s focus on fundraising and investment. I also spoke to Ethan Pierse, director of The CryptoAssets Institute, founder of Borderless Ventures to dive deeper into the subject. For him, the difference between IEOs, ICOs, and STOs from the investor and fundraiser point of view is purely about who’s selling the tokens.
“An IEO”, he said, “is just an ICO run directly on the exchange, nothing more. Exchanges run due diligence before accepting the IEO for particular projects.”
While IEOs gives many an opportunity to raise money for interesting projects, it is not 100% secure. It simply offers immediate utility, not future utility, which lets projects gain more visibility. In fact, during the crypto winter, only IEO projects became big fundraising hits. However, Ethan remains cautious. He questions how diligent the due diligence checks are.
“[It’s unclear whether] the exchanges are really doing very thorough due diligence or just taking the money for the IEO,” said Ethan, “including listing on their exchange.”
Investors want valid projects, rather than pure ideas, which explains Ethan’s doubts. Ethan also points out that many people involved in ICOs and IEOs don’t understand the value of hard capital, because they raise money too easily.
When I asked him whether it is better to choose a big worldwide exchange or a local one, he said it all depended on a project. Local projects benefit greatly from local exchanges, while global projects thrive on the biggest worldwide exchanges such as Binance.
Investor interest in the initial exchange offering may come from the feeling that they are somehow more legitimate. One huge plus generally is in marketing support. “Exchanges do provide visibility,” Ethan offered. “They’re creating content and visibility for your project and shifting it toward exchanges and your project. It also saves money for the project because part of the ICO fundraising would normally go toward listing the token on an exchange.”
All in all, if you aim to raise funds for an existing blockchain project and the token has immediate utility at issuance, an IEO is an option to consider for your business.
3. Legal aspects
Of course, the elephant in the room for all blockchain projects is the complex, often unclear web of laws and questions of jurisdiction. To learn more about the legal aspects of IEOs, I talked to Pavel Vasilevski, who provides legal advice for the financial industry and has a vast experience in a blockchain stock exchange.
Pavel stressed that the jurisdiction of the platform chosen to conduct IEO on is very important, as “its reputation and regulation will have many repercussions on the performance of the offering.” He said that “from the IEO perspective, any legal entity located in Switzerland or abroad can conduct an IEO with a crypto exchange located in the same or another jurisdiction.” stockup.ch is the recommended blockchain stock exchange of his choice, as he regards it as a trustworthy and ambitious project. According to Pavel “the biggest challenge is to find a proper crypto exchange, which is able to conduct the IEO for a startup and willing to do everything compliant to the actual legislation.”
4. Business Aspects
To learn more about IEO’s business potential I asked Ralf P. Gerteis, an entrepreneur, executive, and blockchain evangelist to share his thoughts on IEOs. According to Ralf, IEOs work out great for “comparably mature blockchain-based ventures, which have built up a lively community, a certain presence on social media and PR, a team that shows all necessary experience, skills and which brings a good level of reputation.”
He thinks that IEOs make sense for products based on the strong utility of the token, especially if the company wants to develop a healthy ecosystem soon after listing. However, he predicts that the STO’s significance will increase after regulators hammer out all the legal issues. His recipe for initial exchange offering success? A careful plan, an available budget, and business maturity in all relevant aspects.
5. Security aspects
Security comes first, so when On Yavin, CEO of Cointelligence, agreed to share his insight on IEO security, I was delighted. On says that in an ideal IEO project, everyone benefits from the arrangement: from a project team, which doesn’t have to spend too much time on marketing, through investors, who can participate in IEO projects, to exchange companies, which get their cut of proceeds.
Nevertheless, conditions aren’t always ideal, and too often exchange companies have too much power in selecting projects and focus mainly on profits. Consequently, they ignore many great projects. On also warns against scammers, stating that “the scams can come from two fronts with an IEO: the project itself, or the hosting exchange.
Projects can be scammed by unscrupulous exchanges that don’t deliver what they promised.” He also mentioned that although exchanges should be doing due diligence, many of them don’t. What is one of the things to look out for when working with IEO? According to On, security. In his view, people “should look into what sort of insurance the exchange has for the funds it’s holding,” as exchanges are often on hackers’ radar.
As with every new solution, it’s important to exercise caution. Beware of scammers, and always check whether the tool is the best match for your needs. The initial exchange offering is relatively easy to navigate and guarantees great visibility, so it could work if your project has good liquidity. A careful plan, an available budget, and business maturity in all relevant aspects should be enough to ensure your success in IEO projects, but each case is different. Minimize the risks to maximize the potential of IEO and you will discover a whole new world of business possibilities.
After reaching out to several cryptocurrency exchanges, the cost to list an initial coin offering varies project to project. They tend to calculate based on trading volumes. For the technical review and development process, it’s also important to pick a solid partner. For more information on building and launching an IEO, drop us a line and we’ll guide you through the process.