Is the Initial Exchange Offering (IEO) the Key to Transparent Crypto Fundraising?
Tags: Security Token, Crypto, Initial Exchange Offering, ICO, Fundraising

Is the Initial Exchange Offering (IEO) the Key to Transparent Crypto Fundraising? faast Follow Mar 5 · 4 min read

The Initial Coin Offering (ICO) was the biggest breakthrough in business fundraising in recent memory. For the first time, ordinary people around the world could essentially participate in digital IPOs, and reap massive gains without being an accredited investor. Many people became very wealthy during the ICO heyday of 2015–2017…but unfortunately, many more people got burned.

Do these Initial Exchange Offering (IEO) offer a solution? What are the pros and cons of IEOs? and what are the long term implications of this fundraising method for the crypto space?

The Problem with ICOs (and STOs)

While ICOs opened up a type of investing that was previously off limits to most people, it also exposed them to far more risk. Many ICOs were organized overseas in less scrupulous jurisdictions, where investors had to just take the team at their word that the project was real.

The lack of regulation made ICOs the perfect mechanism for scammers to con investors out of their money with bogus projects.

Once a fundraising goal was reached, fraudsters could simply shut their websites shut down and disappear without a trace.

Plus, even if the ICO was legitimate, “whales” with hundreds of thousands (or millions) of tokens could just wait until a public listing, and then dump their holdings on the retail investors, leaving them holding the bags.

As if that wasn’t enough, many so-called “utility” tokens had no actual utility at all; they were simply a blockchain-based version of security. With all this going on it was only a matter of time before regulators caught on to what was happening and brought the hammer down.

The Security Token Offering (STO) was supposed to be the solution to this problem. STOs abide by much more stringent rules, such as KYC/AML verification, and requiring participants to be accredited investors. While this certainly helps reduce fraudulent activity, it also places many barriers to entry for investors, and eliminates a lot of the positive aspects of ICOs, such as increased accessibility.

In some people’s minds, this is antithetical to the whole purpose of cryptocurrency which, among other things, is reducing centralized control of finance.

What is an Initial Exchange Offering (IEO)?

IEOs represent a sort of middle ground between these two approaches. With an IEO, the initial fundraising event is hosted by an exchange rather than the project itself.

There are multiple reasons why this approach can offer much greater security for the investor than an ICO. With an IEO, the exchange hosting the event acts as a gatekeeper and is trusted to screen out fraudulent or suspicious projects from holding a fundraising event on their platform.

At this time, there multiple prominent exchanges have opened their own IEO platforms, including Binance Launchpad, Huboi Prime, BitMax Launchpad and Bittrex International IEO.

For each of these platforms, projects wishing to hold an IEO must meet specific criteria in order to be approved, and the exchange reserves the right to cancel the IEO if it believes it is not in the best interest of their customers.

One notable example of this was when Bittrex cancelled the IEO for RAID when they learned the project’s partnership with an e-gaming data analytics company had been terminated. Bittrex believed that this partnership formed an indispensable part of RAID’s value proposition, and that without it, supporting this IEO was not beneficial to Bittrex users. For this reason, they cancelled the IEO only six hours before it was scheduled.

While that’s certainly an extreme case of an IEO gone wrong, there are plenty more examples of IEOs that were very successful. One example was when BitTorrent (currently owned by TRON) held their IEO on Binance Launchpad and hit their crowdsale hardcap in only 15 minutes, raising $7.2 million USD.

If that seems slow to people who’ve been following ICOs for a while, don’t worry. Once investors became more comfortable with this fundraising method the money started pouring in. Another project, Fetch.AI, raised a respectable $6 million in only 22 seconds.

While the primary benefit of IEOs is increased security for investors, they are also beneficial for the projects themselves. With an ICO, the project must devote enormous resources to marketing in order to get the public’s attention and sell them on why it’s a good investment.

With an approved IEO however, the exchange hosting the event helps market it as well. Any IEO announcement on a major exchange is probably going to make the news anyway, so far less money has to be spent running “bounties” and other marketing campaigns.

There are trade offs however: getting listed on an exchange isn’t cheap, and the exchange will most likely require a percentage of the allocated IEO tokens as the cost of doing business.

In some sense, it also goes against the original ethos of cryptocurrency, since it is introducing a centralized gatekeeper into the equation.

Will IEOs Fuel Another Crypto Bubble?

The 2017 crypto bubble was caused by a number of factors, including bitcoin halving the year before, and also due to the preposterous amount of money raised by totally unregulated ICOs. Given that unregulated, free for all fundraising is becoming a thing of the past, it is unlikely that IEOs could trigger a 2017-like bubble.

It is more likely that the increased scrutiny of exchanges will prevent fraudulent projects from over inflating and discrediting the crypto market. But IEOs remain a relatively new development in the cryptocurrency world, and it remains to be seen if this method will drive a shift from decentralized fundraising toward centralized exchange bottlenecks.