Initial Exchange Offerings
In 2018 an alternative to ICOs appeared, the so-called Initial Exchange Offerings (IEO). The main difference between these crowdfunding methods lies in the crucial role of the exchange, which selects promising and viable projects.
After the completion of an ICO, it can take several months before the offered tokens are quoted on an exchange. Due to this delay process, the projects usually lose much hype. In the case of an Initial Exchange Offering, the exchange is the vital partner of the start-up. So, it can issue tokens and send them to the exchange. Which, in turn, distributes the digital asset among the interested investors who are already KYC-verified users of the trading platform.
Instead of the traditional ICO, where investors send money to a smart contract
, an IEO participant has to register on the exchange, transfer money to the account and, after the start of the token sale, buy coins
directly on the exchange.
The agreement between the exchange and the distributer may contain different conditions:
- Maximum Sales
- Asset Price
- Soft- & Hardcap
The scope of the Initial Currency offering has developed rapidly in recent years, but at the end of 2018, it was virtually exhausted. The causes of this are the legal uncertainty, the failure to keep promises, the bankruptcy of many projects, fraud, and the lack of rights to protect investors and the lack of action by financial regulators.
Perhaps an improved method (such as an STO) of fundraising will be the logical consequence of the ICO tree. Its success will be repeated, restoring confidence in token sales.
The exchange requires due diligence of the projects, in which the investment attractiveness of the projects, the feasibility of the product
development, the risks, the financial situation and the market position are estimated. The exchange takes on reputational risks and increases investor confidence.
In recent years, ICO projects have chosen to move from public to private offers, which are generally only accessible to more significant investors. IEO democratizes the process of investing and makes it available to a wide range of investors.
If the exchange at which the IEO is held is centralized, the possibility of gas wars is excluded. We are talking about the situation in which the participants in the Ethereum
token sale compete with each other and set high gas limits. This to increase the speed of transactions because first come first served. From the project's perspective, the IEO also has other advantages.
The most significant advantage of this method for the projects is that a large number of potential IEO investors come from a large number of users of the exchange. This reduces marketing & KYC costs.
Besides, both the project and the exchange are involved in the marketing of the IEO.
With ICOs, getting listed on an exchange is the next step after the completion of the sale. The listing procedure is often expensive and time-consuming. At the same time, there is no guarantee that the coin will be available at an exchange and will get liquidity. The IEO optimizes this process because tokens get liquidity immediately.
In any case, token issuers will have to pay considerable amounts for the listing, which may differ on other exchanges. The exchange may also require a certain percentage of the total sale.
Projects that distribute tokens through the IEO program are responsible for the most significant marketing costs. The exchange team should be composed of qualified and technically sensible analysts who can expertly and systematically assess the long- term potential of projects and the viability of the business models. In the event of a failed campaign, the exchange involves reputational risks.